## _cr1145 ## Source details **Canonical URL:** [_cr1145](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1145.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1145.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1145.pdf.json) --- ### Introduction — recent performance and vulnerabilities - Real GDP growth averaged over 9 percent during 2000–07. - Preliminary estimates suggest growth fell some 10 percentage points below its pre-crisis average in 2009. - Overall fiscal deficit increased to over 8 percent of GDP in 2009, up by more than 5 percentage points over 2008. - Domestic financing rose to nearly 2 percent of GDP in 2009 (first time since 2003). - Reserve requirements were reduced from 16 to 12 percent; an overdraft facility was introduced. - Cambodia has a shallow and highly dollarized financial system; characterized as the most dollarized in Asia in the source figures. ### Outlook and balance of risks - Growth and sectoral developments (2010) - Garment exports and tourist air arrivals grew between 10 to 20 percent (y/y) in Q2 2010. - Construction activity remained sluggish; most related imports still negative. - A late start of the rainy season may dent agricultural output growth. - Inflation and credit (2010 developments) - CPI inflation rose to an average 7 percent in the first quarter of 2010, from about -½ percent on average in 2009. - Credit growth reached 23 percent (y/y) in August 2010, from 6½ percent at end 2009. - External position and exchange rate - Current account deficit likely to widen to about 7 percent of GDP (including official transfers) in 2010. - Official reserves rose modestly to about 3½ months of import cover. - Riel has depreciated somewhat against the U.S. dollar; the real effective exchange rate appears somewhat overvalued partly due to a pre-crisis surge in inflation. - Staff projections and medium-term outlook - Staff projects growth to reach 4½–5 percent in 2010. - Staff projects the headline CPI index to rise 4 percent on average in 2010. - Under the baseline, growth is expected to gradually return to potential of about 6–7 percent over the medium term. - Current account deficit (excluding official transfers) is modeled to rise early in the recovery to about 13½ percent of GDP in 2010 and decline to about 8½ percent of GDP in 2015, remaining fully financed by grants, official external financing, and FDI. - Risk assessment - Near-term risks are tilted to the downside given Cambodia’s narrow export base and heavy reliance on U.S. and European markets (garment exports to these destinations account for 40 percent of total goods and services exports). - Financial system weaknesses (shortcomings in banking supervision, enforcement, uneven credit risk management and data reporting, and high dollarization) constrain NBC’s ability to act as lender of last resort. ### Fiscal management and consolidation prospects - 2010 budget outturn through August suggests consolidation is on track. - Revenue developments - Cumulative direct tax collection through the first eight months rose by 11 percent (y/y). - Cumulative indirect tax collection through the first eight months rose by 13 percent (y/y). - Profit tax collection has gained momentum since May 2010 and has been consistently better than 2009. - Staff estimates that revenue could exceed the budget target by about ½–1 percent of GDP. - Spending and financing - If current spending remains under control and planned cuts in defense and security continue, the current balance could turn positive and reach about ¾ percent of GDP. - This positive current balance could provide almost half of the funding for budgeted locally financed capital spending. - Higher-than-budgeted disbursements of concessional loans and grants imply externally-financed capital spending could exceed the budget by about 1 percent of GDP. - This would yield a higher overall fiscal deficit (including grants) of 3¼ percent of GDP (compared with about 2¾ percent of GDP in the budget). - Recourse to domestic financing would be kept well below the budget target, at about 1 percent of GDP, and significantly lower than in 2009. - Staff emphasized the need for fiscal adjustment beyond 2010: illustrative medium-term scenario envisages a deficit reduction (excluding grants) by about 2½ percent of GDP between 2010 and 2015. ### Debt sustainability — main findings and scenarios - DSA summary - Joint IMF/World Bank DSA (2010) concludes Cambodia faces a moderate risk of debt distress. - At end-2009 external PPG debt stock: around 28 percent of GDP (nominal) and 22 percent in NPV terms. - PV of debt to revenue: around 189 percent (approaching the 200 percent threshold). - Baseline projections and sensitivities - Baseline assumes fiscal consolidation: deficit reduction (excluding grants) by about 2½ percent of GDP between 2010 and 2015. - PV public sector debt-to-GDP: 23 percent in 2009; rise to around 24 percent in 2010; decline to around 18 percent by 2020. - Nominal public debt: 29 percent of GDP at end-2009; expected to rise to 31 percent by end-2010; under baseline begins to decline as share of GDP in 2011. - Stress tests and alternative scenarios - One bound test (one-time 30 percent nominal depreciation of the riel vis-à-vis the U.S. dollar in 2011): - NPV debt-to-revenue ratio rises to about 235 percent in 2011, then declines below 200 percent by 2015. - NPV debt-to-GDP ratio peaks at 31.4 percent in 2011, then falls under 30 percent in 2013. - Authorities’ scenario of increasing borrowing limits (SDR 200 million to SDR 400 million for 2011–13, ≈2 percent of GDP): - Debt level would rise and Cambodia’s scope for absorbing additional risks would be significantly reduced. - In several bound tests, indicative thresholds are breached for three years or more. - To return debt levels by 2020 to baseline would require average annual GDP growth 1.7 percentage points higher than baseline and stronger revenue growth. - Contingent liability risks - Build-operate-transfer (BOT) hydropower schemes. - Banking system weaknesses. - A sooner-than-anticipated shift of aid financing from grants to loans. - Policy implications from DSA - Adopt a prudent borrowing strategy and continue fiscal consolidation. - Carefully select investment projects to ensure they are growth-enhancing. - Improve debt management capacity and maintain an inventory and analysis capacity for contingent liabilities. ### Revenue administration and tax mobilization - Revenue gap and potential - Cambodia’s tax revenue to GDP ratio is about 5–7 percent below its potential (estimates based on experience in other low-income countries and controlling for country-specific fundamentals). - Bringing VAT productivity to levels comparable with other Asian low-income countries would yield an additional 1½ percent of GDP. - Replacing the reference price for taxes on petroleum imports to the current transactions price level would yield about 1 percent of GDP. - Higher “sin” taxes on alcohol and tobacco could generate an additional 0.2 percent of GDP. - Government target and staff support - Team supported the government’s target of improving the tax revenue to GDP ratio through better administration by 0.5 percentage points per year. - Administrative priorities - Enhance taxpayer compliance through auditing. - Information sharing among revenue-collecting and law-enforcement agencies. - Taxpayer education. - Improved governance within revenue-collecting agencies and protection of enforcement officers. - Implement a comprehensive strategy to enable more aggressive collection of tax arrears, which rose 20 percent in the year ending July 2010. - Strategic considerations - Calculations assume increases in domestic retail prices relative to neighboring countries do not erode the tax base; requires curbing smuggling via improved customs control. - Staff recommended better information sharing and transfer of know-how from the General Customs and Excise Department to the General Tax Department. - IMF stands ready to provide further technical assistance in customs and tax administration. ### Monetary policy, dollarization, and liquidity management - Dollarization and seigniorage costs - Dollarization (ratio of foreign currency deposits to broad money) rose from about 60 percent in the late 1990s to about 80 percent in 2010. - Comparator shares: 50 percent in Lao P.D.R., 30 percent in Mongolia, and 20 percent in Vietnam. - Based on a reserve money growth method, Cambodia is losing an estimated 5 percent of GDP in recent years in seigniorage. - Based on comparator estimates, seigniorage loss could range from about 5–19 percent of GDP. - The ratio of official reserves to foreign currency deposits declined to 70½ percent at end-September 2010 from 84 percent a year earlier. - Liquidity overhang and reserve requirements - Staff cautioned authorities to monitor closely the current liquidity overhang. - Recommendation: NBC should be prepared to increase the reserve requirement on foreign currency deposits; gradually return reserve requirements on U.S. dollar deposits to pre-crisis level (16 percent) and beyond, if necessary. - Authorities intend to step up daily liquidity monitoring and, with IMF TA, assess impact of changes in reserve requirements on banks’ liquidity positions. - Sequencing and capacity building to enhance monetary independence - Implement a comprehensive liquidity monitoring framework (in both U.S. dollar and riel, using daily data). - Put in place coordination and information-sharing mechanisms with the National Treasury and other agencies. - Establish an independent in-house research unit to inform the Monetary Policy Committee (MPC). - Disseminate more frequent and up-to-date data and analysis on monetary and credit developments, including on the NBC website. - Develop an interbank money market (in both U.S. dollar and riel) to reduce vulnerabilities and allow more effective monetary policy implementation. - Over time, progress would create space for moving away from exchange rate-based stabilization. ### Financial supervision and sector vulnerabilities - System structure and risks - Bank credit to the private sector: about 26 percent of GDP. - Over 95 percent of banking system deposits are denominated in U.S. dollar. - Five large banks account for nearly 80 percent of credit. - Micro-finance institutions represent less than 10 percent of financial system assets. - Asset quality and data concerns - Reported aggregate NPL ratio for 2009 of around 4 percent may be substantially understated due to uneven implementation and enforcement of strengthened regulation on asset classification. - Core financial soundness indicators compiled by the NBC are based on unreliable data reported by banks; credit and solvency risks may be substantially underestimated. - Breakeven analysis references a risk-weighted capital-asset ratio (CAR) of 15 percent to estimate NPL thresholds that would reduce CAR to the required 15 percent minimum. - High-priority supervisory recommendations - Address acute shortages of human resources and technical capacity; operationalize MOUs with foreign supervisors. - Formally place a moratorium on new bank licensing while supervisory capacity is inadequate. - Establish a mechanism for dealing with systemic and illiquid or insolvent banks; anchor crisis management framework in an explicit financial stability mandate for the NBC. - Enhance Prompt Corrective Action (PCA) regulation. - Strictly enforce regulations on asset classification and provisioning, and on minimum capital requirements; intensify actions with banks toward meeting the new minimum capital requirement by end-2010. - Develop regulations for risk-based and forward-looking supervision and implement consolidated supervision at the bank level. - Strengthen AML/CFT measures. ### Private sector growth, diversification, and structural policies - Opportunities - Global rebalancing and greater reliance in Asia on domestic sources of growth provide opportunities for Cambodia to access rapidly growing markets. - Tourism and exports to emerging Asian markets show growth potential; Cambodia could benefit from Chinese outsourcing given existing investor base in the textile industry. - Recommended initiatives - Improve the business environment and address infrastructure bottlenecks; Anti-Corruption Law could reduce cost of doing business. - Renewed emphasis on agricultural development and rural infrastructure (including the Rice Policy) to broaden growth sources and make development more inclusive. - Improve accuracy and timeliness of national accounts statistics; enhance provisional 2009 GDP estimates to incorporate available data on trade, the financial sector, and fiscal accounts. ### Key quantitative facts and selected targets cited - Reserve requirement pre-crisis level for U.S. dollar deposits: 16 percent. - Dollarization (foreign currency deposits to broad money): about 80 percent in 2010. - Bank credit to the private sector: about 26 percent of GDP. - Deposits denominated in U.S. dollar: over 95 percent. - Five large banks account for nearly 80 percent of credit. - Micro-finance institutions represent less than 10 percent of financial system assets. - Reported aggregate NPL ratio for 2009: around 4 percent. - Risk-weighted capital-asset ratio referenced (CAR): 15 percent. - Cambodia ranks 145th out of 183 under the World Bank’s Doing Business Index. - Cambodia ranks 158th out of 180 under the Transparency International Corruption Perception Index. - Rice production 2010 could reach 7.3 million tons; estimated 3.1 million tons needed for local consumption; more than 3.3 million tons available for exports after seed and post-harvest losses. - Officially exported rice: about 30,000 tons (less than 1 percent). - Through 2015 total rice production is targeted to increase by 24 percent to 9.1 million tons. - Paddy rice yield in Cambodia: 2.6 tons per hectare; in Vietnam: 4.9 tons per hectare. - Energy costs account for about 25 percent of total production costs in rice. ### Medium-term projections (selected entries from 2008–15 framework) - GDP at constant prices (percent change, 2008–15): 6.7; -2.0; 4.8; 6.8; 6.5; 6.5; 6.6; 6.8 - Consumer prices (end-year, percent change, 2008–15): 12.5; 5.3; 4.5; 4.0; 3.7; 3.4; 3.0; 3.0 - Revenue (percent of GDP, 2008–15): 12.0; 11.5; 13.0; 13.4; 13.8; 14.2; 14.5; 14.9 - Tax revenue (percent of GDP): 9.9; 9.4; 10.3; 10.9; 11.3; 11.6; 11.9; 12.3 - Overall balance (excluding grants, percent of GDP): -2.8; -8.1; -5.9; -5.4; -4.6; -4.1; -3.7; -3.4 - Current account balance (including transfers, percent of GDP): -6.2; -5.2; -7.0; -9.0; -9.5; -8.0; -7.4; -6.7 - Gross official reserves (millions USD, 2008–15): 2,164; 2,367; 2,550; 2,839; 2,874; 3,007; 3,322; 3,499 - In months of next year's imports: 3.8; 3.7; 3.6; 3.7; 3.5; 3.4; 3.4; 3.3 ### Institutional, statistical, and TA implications - Public Financial Management Reform Program (PFMRP) - Progress in cash management and budget formulation; budget execution and recording remain fragmented, especially for donor-financed capital spending. - Payroll and procurement controls weak: over 60 percent of contracts above the competitive bidding threshold escape competitive bidding through regulatory loopholes. - Near-term strategic measures under Phase II of the PFMRP recommended: deepen budget classification at line ministry level; expedite consolidation of all government deposit accounts; expedite enactment of procurement law and strengthen post procurement audit; strengthen internal audit departments. - Data and statistical improvements - Need for better and faster data for key economic statistics to enhance policy credibility and inform business decisions. - National Institute of Statistics improving consistency with SNA 1993; authorities have not yet published the 2009 national accounts. - External sector statistics need improvement: customs data coverage and valuation problems; gaps in external debt statistics; underreporting of some external transactions. - Technical assistance priorities - IMF TA focus areas: bank supervision, monetary operations, public financial management, customs administration, and macro-financial statistics. - IMF stands ready to provide further TA in customs and tax administration and in implementing FSAP recommendations. ### Executive Board and staff priorities (concise) - Fiscal: continue fiscal consolidation beyond 2010; step up revenue mobilization and strengthen public financial management. - Debt: adopt prudent borrowing strategy; strengthen debt management capacity; monitor contingent liabilities closely. - Monetary/financial: monitor liquidity overhang; be prepared to tighten reserve requirements on foreign currency deposits; develop liquidity monitoring and interbank markets; progress de-dollarization measures carefully sequenced. - Financial supervision: implement high-priority FSAP recommendations; strengthen supervisory capacity, crisis management frameworks, and enforcement of asset classification and capital requirements. - Structural: promote private sector-led diversification, improve business environment, and invest in rural infrastructure and agricultural productivity. *Source: IMF staff report excerpt provided in the content unit.* ### 1. Assessing the Scope for Revenue Enhancement ...............................................................11 ### 1. Assessing the Scope for Revenue Enhancement ...............................................................11 ### Introduction: recent performance and vulnerabilities - Real GDP growth averaged over 9 percent during 2000–07. - Preliminary estimates suggest growth fell some 10 percentage points below its pre-crisis average in 2009. - Overall fiscal deficit increased to over 8 percent of GDP in 2009, up by more than 5 percentage points over 2008. - Domestic financing rose to nearly 2 percent of GDP in 2009 (first time since 2003). - Reserve requirements were reduced from 16 to 12 percent; an overdraft facility was introduced. - Cambodia has a shallow and highly dollarized financial system; the economy is described as the most dollarized in Asia in the source figures. ### Outlook and risks: recovery indicators and balance of risks - Growth and sectoral developments (2010): - Garment exports and tourist air arrivals grew between 10 to 20 percent (y/y) in Q2 2010. - Construction activity remained sluggish; most related imports still negative. - A late start of the rainy season may dent agricultural output growth. - Inflation and credit (2010 developments): - CPI inflation rose to an average 7 percent in the first quarter of 2010, from about -½ percent on average in 2009. - Credit growth reached 23 percent (y/y) in August 2010, from 6½ percent at end 2009. - External position and exchange rate: - Current account deficit likely to widen to about 7 percent of GDP (including official transfers) in 2010. - Official reserves rose modestly to about 3½ months of import cover. - The riel has depreciated somewhat against the U.S. dollar in recent months; the real effective exchange rate appears somewhat overvalued in part due to a pre-crisis surge in inflation. - Staff projections and medium-term outlook: - Staff projects growth to reach 4½–5 percent in 2010. - Staff projects the headline CPI index to rise 4 percent on average in 2010. - Under the baseline, growth is expected to gradually return to potential of about 6–7 percent over the medium term. - Current account deficit (excluding official transfers) is modeled to rise early in the recovery to about 13½ percent of GDP in 2010 and decline to about 8½ percent of GDP in 2015, remaining fully financed by grants, official external financing, and FDI. - Risk assessment: - Near-term risks are tilted to the downside given Cambodia’s narrow export base and heavy reliance on U.S. and European markets (garment exports to these destinations account for 40 percent of total goods and services exports). - Financial system weaknesses (shortcomings in banking supervision, enforcement, uneven credit risk management and data reporting, and high dollarization) constrain the central bank’s ability to act as lender of last resort. ### Policy discussions: returning to sustainable and inclusive growth - Dual policy challenge: - Safeguard macroeconomic stability and policy credibility. - Lay foundations for broader-based and inclusive growth. - Key policy priorities identified: - Expanding room for fiscal policy maneuver and effectiveness. - Strengthening monetary policy implementation and effectiveness in a nascent and highly dollarized financial system. - Preserving financial system stability and mitigating systemic risks. - Promoting private sector–led economic diversification in the context of Asia rebalancing. ### Fiscal management: recent outcomes and fiscal consolidation prospects - 2010 budget outturn through August suggests consolidation is on track. - Revenue developments: - Cumulative direct tax collection through the first eight months rose by 11 percent (y/y). - Cumulative indirect tax collection through the first eight months rose by 13 percent (y/y). - Profit tax collection has gained momentum since May 2010 and has been consistently better than 2009. - Staff estimates that revenue could exceed the budget target by about ½–1 percent of GDP. - Spending and financing: - If current spending remains under control and planned cuts in defense and security continue, the current balance could turn positive and reach about ¾ percent of GDP. - This positive current balance could provide almost half of the funding for budgeted locally financed capital spending. - Higher-than-budgeted disbursements of concessional loans and grants imply externally-financed capital spending could exceed the budget by about 1 percent of GDP. - This would yield a higher overall fiscal deficit (including grants) of 3¼ percent of GDP (compared with about 2¾ percent of GDP in the budget). - Recourse to domestic financing would be kept well below the budget target, at about 1 percent of GDP, and significantly lower than in 2009. *Source: IMF staff report excerpt provided in the content unit.* ### 9. Staff emphasized the need for fiscal adjustment beyond 2010. Cambodia’s ### _cr1145 - 9. Staff emphasized the need for fiscal adjustment beyond 2010. Cambodia’s ### Fiscal adjustment and debt sustainability - Macroeconomic stability critically depends on prudent fiscal policies beyond 2010. - Staff’s illustrative medium-term scenario: - Envisages a deficit reduction (excluding grants) by about 2½ percent of GDP between 2010 and 2015. - Under this path, a debt sustainability analysis indicates Cambodia would retain its moderate risk-of-debt distress rating and regain an ability to absorb future shocks similar to pre-crisis levels (Supplement 1: Joint IMF/World Bank Debt Sustainability Analysis 2010). - The public and external debt-to-GDP ratios would decline to about 26 percent of GDP in 2016, in line with levels before the global financial crisis. - The government would fully replenish its deposits in the banking system (serving as a reserve to finance fiscal stimulus in the absence of a market for government debt and as a backstop to financial system fragilities). - Major contingent liability risks: - Build-operate-transfer (BOT) hydropower schemes. - Banking system weaknesses. - A sooner-than-anticipated shift of aid financing from grants to loans. - Authorities’ inquiry and staff caution: - Authorities considered raising the ceiling on contracting external debt from SDR 200 million to SDR 400 million (financing by about an additional 2 percent of GDP). - Staff cautioned this would delay the pace of consolidation and constrain the government’s ability to respond effectively to further shocks without losing its current moderate risk-of-debt distress rating. ### Revenue administration and tax mobilization - Consensus that gains in tax collection offer the best prospect for securing fiscal sustainability and mobilizing resources for development needs. - Staff estimates and productivity gaps: - Cambodia’s tax revenue to GDP ratio is about 5–7 percent below its potential (estimates based on experience in other low-income countries and controlling for country-specific fundamentals). - Bringing VAT productivity to levels comparable with other Asian low-income countries would yield an additional 1½ percent of GDP. - Replacing the reference price for taxes on petroleum imports to the current transactions price level would yield about 1 percent of GDP. - Higher “sin” taxes on alcohol and tobacco could generate an additional 0.2 percent of GDP. - Government target and staff support: - Team supported the government’s target of improving the tax revenue to GDP ratio through better administration by 0.5 percentage points per year (which would realize about one-third to one-half of the revenue enhancing potential over the medium term). - Administrative priorities and recommended measures: - Enhance taxpayer compliance through auditing. - Information sharing among revenue-collecting and law-enforcement agencies. - Taxpayer education. - Improved governance within revenue-collecting agencies (including protection of enforcement officers and disclosure requirements under the recently adopted Anti-Corruption Law). - Implement a comprehensive strategy to enable more aggressive collection of tax arrears, which rose 20 percent in the year ending July 2010. - Strategic note: - Calculations for tax policy changes assume that increases in domestic retail prices relative to neighboring countries do not erode the tax base; this requires curbing smuggling via improvements in customs control. - Staff recommended better information sharing and transfer of know-how from the General Customs and Excise Department to the General Tax Department. - The IMF stands ready to provide further technical assistance in customs and tax administration. ### Revenue performance and structural features (Box 1) - Long-run and cross-country comparisons: - Since the mid-1990s, tax revenue to GDP ratio has doubled but at 12 percent remains the second lowest among Asian LICs (average 17 percent). - Domestic taxes are especially weak: at 3½ percent of GDP domestic tax collection is at only 17 percent of Vietnam’s level. - About one-half of total revenues are collected from imported goods, with fuel and vehicle imports alone accounting for a combined 60 percent of total customs revenue. - Smuggling and porous borders erode the revenue base. - Attribution of shortfall: - Weak revenue administration is the main factor for low fiscal revenue. - Estimates controlling for fundamentals suggest administrative improvements could make up at least one-half to three-quarters of Cambodia’s underperformance. - Government response: - Authorities have prioritized improvements to revenue administration and target increasing tax revenue to GDP by 0.5 percentage points every year (anchored in the PFMRP) supported by comprehensive action plans emphasizing audits, taxpayer education, and governance improvements. ### Public financial management reform program (PFMRP) - Progress and remaining weaknesses: - Progress in cash management and budget formulation has led to greater fiscal control through mid-year reviews, curbed supplementary expenditure credits, and eliminated expenditure arrears since 2007. - Budget execution and recording remain fragmented, especially regarding donor-financed capital spending, hampering assessment of fiscal and quasi-fiscal activities and effective budget planning. - Payroll and procurement controls are weak: over 60 percent of contracts above the competitive bidding threshold escape competitive bidding through regulatory loopholes. - Staff recommended near-term strategic measures under Phase II of the PFMRP: - Further deepen budget classification at the line ministry level as a precursor to the introduction of a financial management information system and planned de-concentration of budget authority. - Expedite consolidation of all government deposit accounts. - Expedite enactment of the procurement law and strengthen post procurement audit through increased staffing, funding, and training. - Strengthen internal audit departments as an important precursor for de-concentration. ### Transparency and extractive sector disclosure - Staff welcomed recent disclosure of revenue information related to oil exploration. - Staff encouraged consideration of subscribing to the Extractive Industries Transparency Initiative (EITI) to signal commitment to improved governance and strengthen fiscal management. - Authorities intend to strengthen content and procedure of dissemination in line with international norms such as EITI but consider formal subscription premature at this stage. ### Monetary and exchange rate policy: enhancing policy scope and effectiveness - Role of NBC policies and dollarization: - Policies of the NBC have contributed to macroeconomic stability but have not delivered greater monetary independence. - In the absence of a formal monetary framework, the exchange rate vis-à-vis the U.S. dollar has been the effective nominal anchor for three decades; low inflation has not halted the trend increase in dollarization. - Cambodia’s foreign exchange market is shallow; NBC interventions are usually less than US$10 million a month and mainly address seasonal fluctuations. - Recent crisis response and liquidity: - During the recent crisis the NBC reduced the reserve requirement but interest rates remained virtually unchanged, leading to a liquidity overhang as banks sought self-protection. - The foreign currency deposits coverage ratio (in terms of gross official reserves) has steadily declined. - Box 2 findings on dollarization: - Dollarization (ratio of foreign currency deposits to broad money) rose from about 60 percent in the late 1990s to about 80 percent in 2010. - Comparator shares: 50 percent in Lao P.D.R., 30 percent in Mongolia, and 20 percent in Vietnam. - Seigniorage and cost estimates: - Based on a reserve money growth method, Cambodia is losing an estimated 5 percent of GDP in recent years. - Based on estimates of currency in circulation in comparator low-income countries in Asia, seigniorage loss for Cambodia could range from about 5–19 percent of GDP. - The ratio of official reserves to foreign currency deposits declined to 70½ percent at end-September 2010 from 84 percent a year earlier. - Dollarization has grown despite macroeconomic and political stability; growth in the dollar economy (largely urban) outpaced the riel economy (largely agricultural and rural). For example, during 2000–08 real annual GDP growth in manufacturing and hotel and tourism averaged 10½ percent, more than double the rate for agriculture. - Recommended sequencing and capacity building: - Implement a comprehensive liquidity monitoring framework (in both U.S. dollar and riel, using daily data). - Put in place coordination and information-sharing mechanisms with the National Treasury and other agencies under the Ministry of Finance. - Establish an independent in-house research unit for macroeconomic analysis and forecasts to inform the Monetary Policy Committee (MPC). - Disseminate more frequent and up-to-date data and analysis on monetary and credit developments, including on the NBC website. - Develop an interbank money market (in both U.S. dollar and riel) to reduce vulnerabilities induced by a dollarized financial system and allow more effective implementation of monetary policy. - Over time, progress on these fronts would create space for moving away from exchange rate-based stabilization. *Source: IMF staff report excerpt.* ### 16. Staff cautioned the authorities to monitor closely the current liquidity overhang. ### _cr1145 - 16. Staff cautioned the authorities to monitor closely the current liquidity overhang. ### Liquidity, reserve requirements, and monetary stance - Staff cautioned the authorities to monitor closely the current liquidity overhang. - Policy recommendation: The NBC should be prepared to increase the reserve requirement on foreign currency deposits to avoid undue pressures on inflation and the exchange rate from resurgent credit growth as the recovery strengthens. - Specific measure: Gradually return reserve requirements on U.S. dollar deposits to their pre-crisis level (of 16 percent) and beyond, if necessary, to signal banks while minimizing the risk of disrupting their operations. - Implementation actions: Authorities intend to step up daily liquidity monitoring of banks and, with IMF technical assistance, assess the impact of changes in the reserve requirement on banks’ liquidity positions. - Macro advice (Staff appraisal, paragraph 28): - Implement a comprehensive liquidity monitoring framework and put in place the required coordination and information-sharing mechanisms within the government. - Develop an interbank money market. - Stand ready to remove the monetary easing bias in light of the large liquidity overhang to preempt potential undue pressures on reserves and a credit boom. ### De-dollarization and monetary independence - Staff view: Greater monetary independence will critically depend on a national strategy of de-dollarization. - Structural context: Dollarization reflects Cambodia’s unbalanced and narrow growth driven by dollarized urban export and tourism centers. - Policy tools and incentives for greater use of the riel (based on international experience): - A greater differential in reserve requirements in favor of riel deposits to make bank intermediation in riel more attractive and mitigate liquidity risks from runs on dollar deposits in the absence of a lender of last resort. - Requirement for all retailers to list prices in riel. - Promote the use of riel for payments by circulating bills of larger denomination and introducing a clearance tax for checks denominated in foreign currency. - Caution: Administrative measures that prohibit foreign currency deposits are often counterproductive and can undermine confidence in the local currency. ### Financial supervision: mitigating systemic risks and preserving stability - System characteristics and risks: - Bank credit to the private sector is low at about 26 percent of GDP. - Over 95 percent of banking system deposits are denominated in U.S. dollar. - The system is dominated by five large banks (two of which are foreign owned) accounting for nearly 80 percent of credit. - Rural areas are primarily served by micro-finance institutions, representing less than 10 percent of financial system assets. - Asset quality and data concerns: - Reported aggregate NPL ratio for 2009 of around 4 percent may be substantially understated due to uneven implementation and enforcement of strengthened regulation on asset classification. - General lack of effective risk management by banks remains a major concern. - Core financial soundness indicators compiled by the NBC are based on unreliable data reported by banks; credit and solvency risks may be substantially underestimated. - Breakeven analysis is referenced against a risk-weighted capital-asset ratio of 15 percent to estimate NPL thresholds that would reduce CAR to the required 15 percent minimum. - High-priority supervisory and regulatory recommendations (FSAP and staff): - Address acute shortages of human resources and lack of technical capacity; operationalize memoranda of understanding with foreign supervisors to alleviate NBC capacity constraints. - Formally place a moratorium on new bank licensing while supervisory capacity and resources are inadequate. - Establish a mechanism for dealing with systemic and illiquid or insolvent banks; anchor the crisis management framework in an explicit financial stability mandate for the NBC. - Enhance the Prompt Corrective Action (PCA) regulation given the absence of financial safety nets. - Strictly enforce new regulations on asset classification and provisioning, and on minimum capital requirements; intensify actions with banks toward meeting the new minimum capital requirement by end-2010. - Develop regulations for risk-based and forward-looking supervision and implement consolidated supervision at the bank level by the NBC. - Put in place an adequate regulatory and supervisory framework for the securities market. - Clearly define modalities for enhanced cooperation and coordination between the NBC and other domestic supervisors through memoranda of understanding. - Address gaps, conflicts, and overlaps in the financial sector legal and regulatory frameworks (e.g., between the banking and securities laws). - Strengthen anti-money laundering and combating of financing of terrorism (AML/CFT) measures. ### Private sector growth, diversification, and structural policies - Opportunities: - Global rebalancing and greater reliance in Asia on domestic sources of growth provide opportunities for Cambodia to access rapidly growing markets. - Tourism and exports to emerging Asian markets show growth potential; Cambodia could benefit from Chinese outsourcing given existing investor base in the textile industry. - Recent and recommended initiatives: - Improve the business environment and address infrastructure bottlenecks; promulgation of the Anti-Corruption Law is welcomed as it could significantly reduce the cost of doing business. - Renewed emphasis on agricultural development and rural infrastructure (including the Rice Policy) to broaden growth sources and make development more inclusive. - Data and statistical improvements: - Staff underscored the need for better and faster data for key economic statistics to enhance policy credibility and inform business decisions. - Recommendation: Improve the accuracy and timeliness of national accounts statistics; enhance provisional 2009 GDP estimates to fully incorporate available data on trade, the financial sector, and fiscal accounts. ### Key quantitative facts and targets cited in the chapter - Reserve requirement pre-crisis level for U.S. dollar deposits: 16 percent. - Bank credit to the private sector: about 26 percent of GDP. - Deposits denominated in U.S. dollar: over 95 percent. - Five large banks account for nearly 80 percent of credit. - Micro-finance institutions represent less than 10 percent of financial system assets. - Reported aggregate NPL ratio for 2009: around 4 percent. - Risk-weighted capital-asset ratio (CAR) referenced: 15 percent. - Cambodia ranks 145th out of 183 under the World Bank’s Doing Business Index. - Cambodia ranks 158th out of 180 under the Transparency International Corruption Perception Index. - Rice production in 2010 could reach 7.3 million tons; estimated 3.1 million tons needed for local consumption; more than 3.3 million tons available for exports after seed and post-harvest losses. - Officially exported rice: about 30,000 tons (less than 1 percent). - Through 2015 total rice production is targeted to increase by 24 percent to 9.1 million tons. - Paddy rice yield in Cambodia: 2.6 tons per hectare; in Vietnam: 4.9 tons per hectare. - Energy costs account for about 25 percent of total production costs in rice. ### Staff appraisal — concise synthesis - Economic setting: The global crisis revealed Cambodia’s structural vulnerabilities; output contracted in 2009 and poverty likely rose, but a broadening export-led recovery is under way. - Outlook and risks: Fragile global recovery and narrow export base expose Cambodia to significant downside risks; banking system weaknesses, high dollarization, and limited fiscal policy space constrain resilience. - Fiscal policy: Fiscal consolidation is on track to meet the 2010 budget target; further consolidation and revenue mobilization are necessary as the recovery strengthens. - Monetary policy: Move away from exchange rate-based stabilization over time by improving liquidity monitoring, developing an interbank money market, and pursuing de-dollarization. - Financial sector policy: Implement high-priority FSAP recommendations to address data inadequacies, weak supervision, enhance crisis resolution, and enforce regulations to reduce systemic risks and limit potential fiscal costs. - Economic diversification: Strengthen the investment climate, expand market access, and enhance rural infrastructure to tap new markets and reduce poverty; implement Anti-Corruption Law and agricultural policies. *Source: _cr1145 - 16. Staff cautioned the authorities to monitor closely the current liquidity overhang.* ### 31. It is recommended that the next Article IV consultation take place on the standard ### _cr1145 - 31. It is recommended that the next Article IV consultation take place on the standard 12-month cycle. ### Recommendation - It is recommended that the next Article IV consultation take place on the standard 12-month cycle. ### Output and prices (selected annual percent changes) - GDP in constant prices: 13.3, 10.8, 10.2, 6.7, -2.0, 4.8 (2005–2010 series as presented) - (Excluding agriculture): 8.1, 17.3, 12.2, 7.0, -4.4, 4.9 - Real agricultural output: 15.7, 5.5, 5.0, 5.7, 4.9, 4.4 - GDP deflator: 6.1, 4.6, 6.5, 21.9, 0.3, 0.8 - Inflation (end-year): 8.4, 4.2, 14.0, 12.5, 5.3, 4.5 - Inflation (annual average): 6.3, 6.1, 7.7, 25.0, -0.7, 4.0 ### Saving and investment (percent of GDP) - Gross national saving: 14.6, 19.9, 18.3, 13.3, 10.8, 11.5 - Government saving: 1.9, 1.8, 2.9, 2.6, -0.1, 0.8 - Private saving: 12.7, 18.1, 15.5, 10.7, 10.9, 10.6 - Gross fixed investment: 18.5, 20.6, 20.8, 19.5, 16.0, 18.5 - Government investment: 4.9, 5.7, 6.1, 5.8, 8.4, 7.4 - Nonbudgetary grant-financed investment: 3.7, 4.0, 4.3, 3.0, 2.4, 4.0 - Private investment: 9.9, 10.8, 10.5, 10.7, 5.2, 7.1 ### Money and credit (annual percent change or levels) - Broad money: 16.1, 38.2, 62.9, 2.9, 4.8, 36.8, 22.7 (selected series) - Net credit to the government (contribution to broad money growth) 1/: -4.9, -10.1, -12.4, -10.4, 6.2, 1.2 - Private sector credit: 31.8, 51.6, 76.0, 55.0, 6.5, 28.5 - Velocity of money 2/: 5.4, 4.9, 3.9, 3.7, 3.2, 2.6 ### Public finance (percent of GDP) - Revenue 3/: 10.3, 11.5, 11.9, 12.0, 11.5, 13.0 - Tax revenue: 7.6, 7.9, 9.5, 9.9, 9.4, 10.3 - Expenditure: 12.8, 14.2, 14.7, 14.8, 19.6, 18.8 - Current expenditure: 7.9, 8.5, 8.7, 9.0, 11.2, 11.5 - Capital expenditure 4/: 4.9, 5.7, 6.1, 5.8, 8.4, 7.4 - Overall budget balance (excluding grants): -2.5, -2.7, -2.9, -2.8, -8.1, -5.9 - Foreign financing, net: 4.9, 4.8, 5.0, 5.3, 6.3, 5.5 - Domestic financing, net 5/: -2.4, -2.0, -2.2, -2.5, 1.8, 0.4 ### Balance of payments (millions of U.S. dollars; selected) - Exports, f.o.b.: 2,910; 3,694; 4,083; 4,708; 4,137; 4,563 (2005–2010) - Exports annual percent change: 12.4, 26.9, 10.6, 15.3, -12.1, 10.3 - Imports, f.o.b.: -3,904; -4,727; -5,474; -6,509; -5,831; -6,679 - Imports annual percent change: 19.4, 21.1, 15.8, 18.9, -10.4, 14.5 - Current account (including official transfers): -240; -47; -213; -700; -562; -828 - In percent of GDP: -3.8; -0.6; -2.5; -6.2; -5.2; -7.0 - Gross official reserves 6/: 915; 1,097; 1,616; 2,164; 2,367; 2,550 - In months of prospective imports: 2.0; 2.1; 2.6; 3.8; 3.7; 3.6 - In percent of foreign currency deposits: 105.0; 85.7; 70.8; 95.2; 77.4; 66.7 ### External debt (millions of U.S. dollars, selected) - Public external debt 7/: 2,131; 2,245; 2,555; 2,808; 3,054; 3,514 - In percent of GDP: 33.9; 30.9; 29.4; 24.9; 28.1; 29.9 - Public debt service: 50; 52; 55; 59; 66; 66 - In percent of exports of goods and services: 1.2; 1.0; 1.0; 0.9; 1.1; 1.1 ### Medium-term projections and balance of payments (2008–15 highlights) - Current account (including official transfers): -700 (2008), -562 (2009), -828 (2010), -1,179 (2011), -1,384 (2012), -1,285 (2013), -1,311 (2014), -1,306 (2015) - Current account (excluding official transfers): -1,382 (2008), -1,261 (2009), -1,590 (2010), -1,672 (2011), -1,673 (2012), -1,588 (2013), -1,629 (2014), -1,640 (2015) - Trade balance: -1,801 (2008), -1,694 (2009), -2,115 (2010), -2,258 (2011), -2,408 (2012), -2,606 (2013), -2,795 (2014), -2,999 (2015) - Exports, f.o.b. (2008–15): 4,708; 4,137; 4,563; 4,990; 5,446; 5,954; 6,494; 7,080 - Garments exports (selected): 3,006; 2,501; 2,806; 3,077; 3,374; 3,702; 4,050; 4,431 - Imports, f.o.b. (2008–15): -6,509; -5,831; -6,679; -7,248; -7,855; -8,561; -9,289; -10,079 - Petroleum imports (selected): -1,924; -1,805; -2,147; -2,346; -2,475; -2,608; -2,709; -2,808 - Services and income (net): 135; 139; 203; 225; 320; 540; 636; 771 - Tourism credits (selected): 1,219; 1,185; 1,249; 1,346; 1,467; 1,610; 1,764; 1,950 - Capital and financial account: 1,215; 659; 943; 1,452; 1,404; 1,403; 1,609; 1,472 - Foreign direct investment 1/: 815; 506; 632; 746; 831; 927; 1,006; 1,099 - Overall balance (2008–15, selected): 515; 961; 1,427; 731; 911; 829; 816; 5 - Gross official reserves (2008–15): 2,164; 2,367; 2,550; 2,839; 2,874; 3,007; 3,322; 3,499 - In months of next year's imports: 3.8; 3.7; 3.6; 3.7; 3.5; 3.4; 3.4; 3.3 ### Medium-term macroeconomic framework (2008–15 summary) - GDP at constant prices (percent change, 2008–15): 6.7; -2.0; 4.8; 6.8; 6.5; 6.5; 6.6; 6.8 - Consumer prices (end-year, percent change, 2008–15): 12.5; 5.3; 4.5; 4.0; 3.7; 3.4; 3.0; 3.0 - Gross national saving (percent of GDP, 2008–15): 13.3; 10.8; 11.5; 10.0; 10.5; 12.5; 14.1; 15.3 - Gross fixed investment (percent of GDP, 2008–15): 19.5; 16.0; 18.5; 19.0; 20.0; 20.5; 21.5; 22.0 - Revenue (percent of GDP, 2008–15): 12.0; 11.5; 13.0; 13.4; 13.8; 14.2; 14.5; 14.9 - Tax revenue (percent of GDP): 9.9; 9.4; 10.3; 10.9; 11.3; 11.6; 11.9; 12.3 - Overall balance (excluding grants, percent of GDP): -2.8; -8.1; -5.9; -5.4; -4.6; -4.1; -3.7; -3.4 - Current account balance (including transfers, percent of GDP): -6.2; -5.2; -7.0; -9.0; -9.5; -8.0; -7.4; -6.7 - Foreign direct investment (percent of GDP, 2008–15): 7.2; 4.7; 5.4; 5.7; 5.7; 5.8; 5.7; 5.6 - Gross official reserves (millions USD, 2008–15): 2,164; 2,367; 2,550; 2,839; 2,874; 3,007; 3,322; 3,499 - Public external debt (millions USD, 2008–15): 2,808; 3,054; 3,514; 3,813; 4,176; 4,460; 4,904; 5,268 - Public external debt (percent of GDP): 24.9; 28.1; 29.9; 29.1; 28.6; 27.7; 27.8; 27.0 ### General government operations (budgetary highlights, 2007–11) - Total revenue (in billions of riels, selected): 4,165; 5,463; 5,182; 5,179; 5,837; 3,817; 6,139; 7,219 (various columns) - Tax revenue (in billions of riels, selected): 3,343; 4,494; 4,177; 4,228; 4,763; 3,029; 4,861; 5,878 - Trade taxes (selected): 903; 1,087; 1,032; 964; 1,022; 641; 1,210; 1,410 - Total expenditure (in billions of riels, selected): 5,164; 6,751; 7,422; 8,805; 8,421; 5,130; 8,919; 10,152 - Current expenditure (in billions of riels, selected): 3,043; 4,097; 4,663; 5,019; 5,300; 3,166; 5,429; 6,163 - Capital expenditure (in billions of riels, selected): 2,121; 2,654; 2,759; 3,787; 3,121; 1,964; 3,490; 3,988 - Overall balance (excluding grants, in percent of GDP): -2.9; -2.8; -4.2; -8.1; -5.5; -2.8; -5.9; -5.4 - Overall balance (including grants, in percent of GDP): -0.7; 0.3; -2.0; -4.0; -2.8; -1.1; -3.2; -3.0 - Financing composition (net, percent of GDP): foreign and domestic financing movements presented (foreign net and domestic net series shown) ### Monetary survey and banking (selected, 2007–10) - Net foreign assets (in billions of riels, selected): 10,735; 10,346; 11,222; 12,611; 13,869; 14,655; 15,515; 16,482; 16,674; 16,720; 16,881 - Net domestic assets (in billions of riels, selected): 576; 1,513; 1,266; 1,249; 1,042; 1,573; 1,720; 1,785; 1,837; 1,955; 3,037 - Domestic credit (in billions of riels, selected): 4,570; 6,907; 6,766; 7,241; 7,663; 8,280; 8,662; 9,498; 9,886; 10,205; 11,477 - Private sector credit (in billions of riels, selected): 6,385; 9,893; 9,813; 10,130; 10,127; 10,532; 11,147; 11,859; 12,187; 12,338; 13,534 - Broad money (in billions of riels, selected): 11,311; 11,859; 12,488; 13,860; 14,912; 16,228; 17,235; 18,267; 18,511; 18,675; 19,919 - Foreign currency deposits (in millions of U.S. dollars, selected): 2,283; 2,273; 2,382; 2,623; 2,844; 3,073; 3,286; 3,499; 3,557; 3,582; 3,823 - Foreign currency deposits (percent of broad money): 80.8; 78.2; 78.1; 78.8; 79.1; 78.6; 79.8; 80.9; 81.5; 81.3; 80.0 - Riel component of broad money (in billions of riels, selected): 2,173; 2,584; 2,738; 2,938; 3,118; 3,479; 3,479; 3,480; 3,423; 3,490; 3,982 - Riel component (percent of broad money): 19.2; 21.8; 21.9; 21.2; 20.9; 21.4; 20.2; 19.1; 18.5; 18.7; 20.0 - Loan-to-deposit ratio (percent, foreign currency loans and deposits only): 67.4; 103.5; 97.6; 97.6; 90.2; 83.5; 80.1; 78.2; 77.2; 77.9; 78.3 - Velocity 2/: 3.9; 3.7; 3.9; 3.7; 3.6; 3.4; 2.8; 2.7; 2.7; 2.7; 2.6 ### Core financial soundness indicators (2009) - Regulatory capital to risk-weighted assets (percent): 33.7; 35.9; 36.6; 36.0 (quarterly series) - Total regulatory capital (in billion riels, quarterly): 3,694; 4,107; 4,435; 4,639 - Risk-weighted assets (in billion riels, quarterly): 10,963; 11,443; 12,113; 12,876 - Regulatory tier 1 capital to risk-weighted assets (percent): 22.4; 25.4; 26.2; 31.0 - Nonperforming loans net of provisions to capital (percent): 9.2; 8.3; 9.2; 4.8 - Nonperforming loans less specific provisions (levels): 338; 343; 408; 223 - Return on equity (percent): 2.7; 4.6; 6.3; 7.7 - Return on assets (percent): 0.4; 0.7; 1.0; 1.5 - Nonperforming loans to total gross loans (percent): 5.0; 5.1; 6.1; 4.3 - Total gross loans (in billion riels): 9,813; 10,103; 10,136; 10,540 - Liquid assets (core) to total assets (percent): 25.3; 29.4; 31.2; 21.0 - Liquid assets (core) to short-term liabilities (percent): 38.3; 42.4; 43.9; 28.7 - Interest margin to gross income (percent): 77.2; 77.0; 75.2; 75.8 - Noninterest expenses to gross income (percent): 56.4; 56.2; 53.8; 54.6 - Memorandum: Dollarization 1/: 78.1; 78.8; 79.1; 78.6 ### Social and development indicators (MDG highlights) - Poverty headcount ratio at $1.25 per day (PPP, percent of population): historical points include 49, 40, 26, 19.5 (presented as series) - Net primary enrollment (percent of relevant age group): 67; ...; 87; 90; ...; 90; 89; ...; 100 (selected series) - Infant mortality rate (per 1,000 live births): 87; 87; 80; 73; 72; 71; 69; 50 (selected series) - Under 5 mortality rate (per 1,000): 119; 119; 107; 96; 93; 91; 90; 38.3 (selected series) - Access to an improved water source (percent of population): 0; 19; 38; ...; 65; 65; 65 (selected series) - Fixed line and mobile phone subscribers (per 100 people): 0.03; 0.2; 1.2; 78; 121; 82; 9... (series fragmented as presented) - GNI per capita, Atlas method (current U.S. dollars): 280; 280; 450; 500; 560; 640 (selected series) ### Joint IMF/World Bank Debt Sustainability Analysis (DSA) — Executive summary and policy implications - The Joint IMF/World Bank DSA (2010) concludes that Cambodia faces a moderate risk of debt distress. - Under the baseline scenario, external debt burden indicators do not breach the relevant policy-dependent indicative thresholds for Cambodia’s classification, but: - The debt level is sensitive to shocks as indicated in standard bound tests. - There are considerable downside risks related to uncertainty about a sustained global recovery, and possible contingent liabilities from infrastructure projects and the banking system. - Increased borrowing over the next three years, as considered by the authorities, would reduce the scope for absorbing additional risks. - Policy recommendations and implications emphasized in the DSA: - Adopt a prudent borrowing strategy. - Continue fiscal consolidation over the medium term. - Carefully select investment projects to ensure they are growth-enhancing. - Improve debt management capacity. *Sources: Data provided by the Cambodian authorities; IMF staff estimates and projections; Joint IMF/World Bank Debt Sustainability Analysis 2010.* ### 1. Cambodia’s DSA indicates that the risk of debt distress is moderate. Under the ### 1. Cambodia’s DSA indicates that the risk of debt distress is moderate. Under the ### Background and main assumptions - At end-2009: - External public and publicly-guaranteed (PPG) debt stock: around 28 percent of GDP (nominal) and 22 percent in net present value (NPV) terms. - PV of debt to revenue: around 189 percent (approaching the 200 percent threshold). - Projections for 2010 (PV terms): - Debt stock as share of GDP: 23 percent. - Debt stock as share of exports of goods and nonfactor services: 42 percent. - Debt stock as share of government revenues: 178 percent. - Composition of external debt (end-2009): - About half held by multilateral creditors: Asian Development Bank 28 percent, IDA 17 percent. - China accounted for about 58 percent of total bilateral disbursements in 2010. - Government domestic balances: - Recorded domestic public debt: slightly less than 1 percent of GDP (end-2009). - Government deposits: about 5 percent of GDP (end-2009). - Arrears: - Cambodia remains in arrears to the Russian Federation and the United States. - Negotiated debt stock included in DSA: Russian Federation US$457 million; United States principal US$162 million. - DSA baseline assumes no restructuring; arrears continue to build throughout the projection period. - Baseline macroeconomic framework (2010–30) — key points from Box 1: - Real GDP growth: 4½–5 percent in 2010; gradual return to potential growth of about 6–7 percent over time. - FDI expected to be sustained at around 5–6 percent of GDP per year (longer term). - Inflation: projected to decline from 4.5 percent in 2010 to around 3 percent over the medium term. - External current account deficit: around 9 percent of GDP in 2010; long-run range 4–5 percent of GDP. - Gross official reserves: around US$2.6 billion (3.6 months of next year’s imports) at end-2010; stabilize at around three months of imports. - Fiscal consolidation: baseline assumes deficit reduction (excluding grants) by about 2½ percent of GDP between 2010 and 2015. - Revenue (excluding grants): rise to around 15 percent of GDP by 2015. - Expenditures: decline to 18.2 percent of GDP by 2015; capital spending return to 6½–7 percent of GDP. - Contingent liabilities and BOT projects: - Several build-operate-transfer (BOT) power projects exist; contingent liabilities not incorporated due to lack of information. - Authorities are collecting details; DSA recommends maintaining an inventory of concessions and building capacity to analyze contingent liabilities. ### External debt sustainability — findings and stress-test results - Baseline scenario: - All external debt indicators remain below policy-dependent thresholds in 2010 and decline over the medium and long term. - Debt service-to-exports and debt service-to-revenue ratios stay well below indicative thresholds throughout the projection period due to concessionality of earlier debts. - Bound tests and stress scenarios: - In one bound test (one-time 30 percent nominal depreciation of the riel vis-à-vis the U.S. dollar in 2011): - NPV debt-to-revenue ratio rises to about 235 percent in 2011, then declines below 200 percent by 2015. - NPV debt-to-GDP ratio peaks at 31.4 percent in 2011, then falls under 30 percent in 2013. - Two indicative thresholds breached in standard alternative scenarios and stress tests: debt-to-GDP and debt-to-revenue ratio for several years (Figure 1 referenced). - Note on dollarization: if 80 percent of GDP is effectively denominated in U.S. dollar (reflecting high degree of dollarization), the NPV debt-to-GDP ratio would remain below the threshold under all standard stress tests. - Country-specific alternative scenario — increased bilateral borrowing (information purposes): - Authorities queried implications of temporarily increasing legal limit on new borrowing from SDR 200 million per year to SDR 400 million for 2011–13 (about 2 percent of GDP), with the old ceiling reinstated in 2014. - Borrowing terms assumed similar to China’s: 20-year maturity, 7-year grace period, 2 percent interest. - Results: - Debt level would rise; Cambodia’s scope for absorbing additional risks would be significantly reduced. - In several bound tests, indicative thresholds are breached for three years or more. - No “growth dividend” is assumed in calculations due to uncertainty about projects financed. - To return debt levels under this scenario by 2020 to levels comparable to baseline, required changes: - Average annual GDP growth would need to be 1.7 percentage points higher than baseline (implying a 25 percent upward shift of potential output growth). - Revenue growth would need to increase even slightly more than that, requiring stronger revenue administration and buoyancy. - Staffs note limited administrative capacity and delays in public management reform would make achieving such a growth dividend difficult. ### Public debt sustainability — projections and sensitivities - Nominal public debt: - Equivalent to 29 percent of GDP at end-2009; expected to rise to 31 percent by end-2010. - Under baseline, public debt begins to decline as a share of GDP in 2011 (current policies assume no issuance of domestic debt). - PV public sector debt ratios: - PV of public sector debt-to-GDP: 23 percent in 2009; rise to around 24 percent in 2010; decline to around 18 percent by 2020. - PV of public debt-to-revenue (inclusive of grants): 144 percent in 2009; rise to 153 in 2010; decline to 97 percent by 2020. - Debt service-to-revenue: remains low in most scenarios under the baseline. - Sensitivity to alternative scenarios: - Unchanged primary balance from 2010 or GDP growth permanently lower by one percentage point: - Public debt (share of GDP) rises to 44 percent and 39 percent by 2030, respectively. - Debt-to-revenue ratio reaches 222 percent and 191 percent by 2030, respectively. - Debt service-to-revenue ratio reaches 29 percent and 22 percent by 2030, respectively. - Bound tests show sensitivity to a 10 percent increase in other debt-creating flows and to a one-time 30 percent real depreciation (though depreciation is less relevant given dollarization). ### Staff assessment and policy implications - Risk assessment: - Staffs view Cambodia faces a moderate risk of debt distress. - External debt burden indicators do not breach thresholds under the baseline; only two thresholds breached under standard stress tests. - Risks are tilted to the downside given uncertainty from implicit contingent liabilities (hydropower projects, other infrastructure, banking sector) and possible delays in hydropower plant operation. - Debt dynamics could evolve rapidly; increased external borrowings would significantly circumscribe the government’s ability to withstand further shocks. - Policy recommendations / priorities: - Improved fiscal management, especially revenue administration, to establish a sound footing for development projects and provide greater room for external loan assistance. - Closely monitor contingent liabilities: develop and maintain an inventory of concessions granted; build and improve capacity to analyze impact of contingent liabilities on debt sustainability. - Carefully contemplate any increased borrowing given potential to limit crisis-response capacity. *Source: IMF staff assessment, Cambodia DSA (text provided).* ### 15. Given the uncertainty about near- to medium-term prospects, staffs urge the ### _cr1145 - 15. Given the uncertainty about near- to medium-term prospects, staffs urge the ### Debt-management guidance and policy recommendations - Staffs urge the Royal Government of Cambodia to continue pursuing a sound strategy for public debt management. - Careful consideration is needed before contracting less concessional loans or providing direct and indirect government guarantees because they could impair sustainability if the revenue base remains low and institutions weak. - Stronger capacity in debt management is identified as an essential prerequisite for less concessional borrowing and other financing arrangements such as BOTs. - Staffs encourage the authorities to continue seeking agreements to resolve outstanding arrears. ### Stress tests and scenario framing (general) - The most extreme stress test is the bound test that yields the highest ratio in 2020. - In Figure 1: the most extreme shock corresponds to a One-time depreciation shock in figures b., d., and f.; to an Exports shock in figures c. and e.; and to a One-time depreciation shock in figure b. - In alternative figures a. and b. the bound tests correspond to Temporary shock to growth, and for c. to a 10 percent of GDP increase non-debt creating flows in 2011. - Scenarios cover 2010–30 and include Baseline, Historical scenario, Most extreme shock, and Threshold lines. ### Key external-debt indicator snapshots and projections (selected) - Baseline present value of external debt (presented as series for 2010–30): 23, 23, 22, 22, 22, 21, 17, 12 (years shown across tables). - Present value (PV) of external debt (selected projection values shown): 21.8; 23.1; 22.6; 22.2; 21.5; 21.6; 21.3; 17.3; 12.0. - PV of external debt (in percent of exports, selected): 41.2; 41.8; 42.5; 42.5; 41.1; 41.3; 41.0; 34.6; 25.7. - PV of PPG external debt (selected): 21.8; 23.1; 22.6; 22.2; 21.5; 21.6; 21.0; 17.3; 12.0. - PV of PPG external debt (in percent of government revenues, selected): 189.2; 178.0; 168.6; 161.0; 152.2; 148.8; 141.6; 106.6; 64.9. - Debt service-to-exports ratio (in percent, selected): 1.0; 0.9; 1.1; 1.1; 1.1; 1.2; 1.3; 1.5; 1.6; 2.0; 1.7. - PPG debt service-to-revenue ratio (in percent, selected): 5.3; 4.3; 5.2; 4.5; 4.5; 4.7; 5.0; 5.6; 5.7; 6.2; 4.2. - Total gross financing need (in billions of U.S. dollars, selected): -0.6; -0.1; 0.1; 0.2; 0.5; 0.6; 0.4; 0.4; 0.3; 0.3; 0.4. ### Public-debt indicators and sensitivity analyses (selected) - Public sector debt (actuals and projections, selected): 30.5; 25.6; 29.0; 30.8; 29.8; 29.2; 28.3; 28.3; 27.5; 22.6; 15.6. - Of which: foreign-currency denominated (selected): 29.6; 24.9; 28.4; 29.9; 29.1; 28.6; 27.7; 27.8; 27.0; 22.3; 15.5. - Change in public sector debt (selected): -2.3; -5.0; 3.5; 1.7; -0.9; -0.6; -0.9; 0.0; -0.8; -0.9; -0.7. - Identified debt-creating flows (selected): -4.5; -6.8; 5.1; 1.6; -0.7; -0.7; -0.9; -0.9; -1.4; -1.7; -2.4. - Primary deficit (selected): 0.5; -0.4; 3.8; 1.8; 1.7; 2.9; 2.8; 2.0; 1.5; 1.2; 0.8; 1.9; 0.2; -1.1; -0.2. - Revenue and grants (percent of GDP, selected): 14.1; 15.1; 15.6; 15.6; 15.9; 16.2; 16.5; 16.8; 17.1; 18.2; 20.0. - Primary (noninterest) expenditure (selected): 14.5; 14.; 6; 19.4; 18.6; 18.6; 18.2; 18.0; 18.0; 17.9; 18.4; 18.8. - Automatic debt dynamics (selected): -5.0; -6.4; 1.3; -1.3; -3.5; -2.7; -2.4; -2.1; -2.3; -1.9; -1.3. - Gross financing need (selected, percent of GDP): 2.7; 0.9; 4.9; 4.1; 4.0; 3.2; 2.7; 2.4; 2.1; 1.5; -0.3. ### Alternative scenarios and sensitivity tests (high-level outcomes) - Baseline external debt PV-to-GDP series (selected): 23; 23; 22; 22; 22; 21; 17; 12 (2010–30 series in tables). - A2 (New public sector loans on less favorable terms in 2010–30) raises several indicators versus baseline; example baseline present value of debt-to-exports series shows increases under A2 (e.g., 42 baseline series to 44/45 under A2 in alternative tables). - Bound-test B6: One-time 30 percent nominal depreciation relative to the baseline in 2011 can push ratios substantially higher (example: PV-to-revenue or PV-to-exports show notable increases in bound tests across tables). - Alternative Scenario of Increasing Borrowing Limits during 2011–13: - Baseline PV of external debt (in percent of GDP) under that scenario: 23; 23; 24; 25; 26; 25; 20; 12. - Under bound tests and A2 in that alternative scenario, PV-to-exports and PV-to-revenue ratios rise markedly (tables detail values across years and shocks). ### Key macroeconomic and financing assumptions used in projections (selected exact values) - Real GDP growth (in percent, selected timeline values): 10.2; 6.7; -2.0; 8.1; 4.1; 4.8; 6.8; 6.5; 6.5; 6.6; 6.8; 6.3; 6.8; 6.7; 6.7. - GDP deflator in U.S. dollar terms (change in percent, selected): 8.6; 21.6; -1.7; 3.8; 7.2; -0.2; 6.6; 4.4; 3.6; 2.7; 3.3; 3.4; 3.3; 3.4; 3.3. - Effective interest rate (percent, selected): 1.1; 0.8; 1.1; 1.1; 0.1; 0.9; 0.9; 1.1; 1.2; 1.3; 1.4; 1.2; 1.4; 1.6; 1.5. - Growth of exports of G&S (U.S. dollar terms, in percent, selected): 12.8; 12.8; -9.3; 15.5; 10.9; 8.7; 9.6; 9.6; 10.7; 9.3; 9.4; 9.5; 9.3; 9.7; 9.5. - Growth of imports of G&S (U.S. dollar terms, in percent, selected): 16.3; 17.8; -9.2; 14.2; 9.4; 12.4; 9.3; 8.5; 8.5; 8.6; 8.6; 9.3; 10.0; 9.5; 9.4. - Grant element of new public sector borrowing (in percent, selected): 27.0; 27.1; 29.0; 32.2; 28.7; 30.4; 29.1; 29.4; 26.0; 28.2. - Government revenues (excluding grants, in percent of GDP, selected): 11.9; 12.0; 11.5; 13.0; 13.4; 13.8; 14.2; 14.5; 14.9; 16.2; 18.5; 17.0. - Aid flows (in billions of U.S. dollars, selected): 0.4; 0.6; 0.4; 0.4; 0.5; 0.5; 0.5; 0.6; 0.6; 0.9; 1.3. - Of which Grants (in billions): 0.2; 0.3; 0.4; 0.3; 0.3; 0.3; 0.4; 0.4; 0.4; 0.6; 1.3. - Of which Concessional loans (in billions): 0.2; 0.2; 0.0; 0.1; 0.1; 0.2; 0.2; 0.2; 0.2; 0.3; 0.0. - Grant-equivalent financing (in percent of GDP, selected): 3.5; 3.3; 3.2; 3.0; 3.1; 2.9; 2.6; 1.9; 2.3. - Memorandum: Nominal GDP (in billions of U.S. dollars, selected): 8.7; 11.3; 10.9; 11.4; 12.9; 14.4; 15.9; 17.4; 19.2; 31.2; 83.1. ### Implementation implications emphasized by staff - Avoid or carefully sequence less concessional borrowing and contingent government guarantees until: - revenue base strengthens (current projections show government revenues excluding grants rising to 16.2 and 18.5 percent of GDP in later projection years in tables), - and institutional capacity in debt management is strengthened. - Staffs flag the need to resolve outstanding arrears and consider the sustainability implications of alternative borrowing scenarios and stress-test outcomes shown in the scenario tables. *Sources: Cambodian authorities; and staff estimates and projections (Tables and Figures, Selected entries from the External Debt Sustainability Framework and Public Sector Debt Sustainability Framework, 2010–30).* ### ANNEX I. CAMBODIA: FUND RELATIONS ### ANNEX I. CAMBODIA: FUND RELATIONS ### Membership and Quota - Joined: 12/31/1969; Article VIII - Quota: 87.50 SDR Million (100.00 percent) - Fund Holdings of Currency: 87.50 SDR Million (100.00 percent) ### SDR Department - Net cumulative allocation: 83.92 SDR Million (100.00 percent) - Holdings: 68.48 SDR Million (81.60 percent) ### Outstanding Purchases and Loans - PRGF arrangements outstanding: 0.00 SDR Million (0.00 percent quota) ### Financial Arrangements (history) - ESAF/PRGF: - Approval Date: 10/22/1999; Expiration Date: 03/05/2003; Amount Approved: 58.50 SDR Million; Amount Drawn: 58.50 SDR Million - ESAF: Approval Date: 05/06/1994; Expiration Date: 08/31/1997; Amount Approved: 84.00 SDR Million; Amount Drawn: 42.00 SDR Million ### Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs) - Charges/Interest: - 2010: 0.01 - 2011: 0.05 - 2012: 0.05 - 2013: 0.05 - 2014: 0.05 - Total: - 2010: 0.01 - 2011: 0.05 - 2012: 0.05 - 2013: 0.05 - 2014: 0.05 ### Multilateral Debt Relief Initiative (MDRI) - IMF Executive Board approval date: January 5, 2006 - Relief: 100 percent of debt incurred by Cambodia to the IMF before January 1, 2005 - Amount forgiven: SDR 56.8 million (about US$82 million) - Use of proceeds: Authorities intend to spend the resources over a number of years, initially on rural irrigation projects - Transfer: National Bank of Cambodia (NBC) transferred the full MDRI proceeds to the Ministry of Economy and Finance effective March 2006 ### Safeguards Assessment - A voluntary safeguards assessment of the National Bank of Cambodia (NBC) was completed in January 2010 (requested by the authorities) - This updated a previous voluntary assessment completed in March 2004 - Findings: - NBC had taken steps to strengthen aspects of its safeguards framework - Important measures proposed in 2004 are still outstanding or in progress - New risks have emerged in the area of external audit - The assessment made appropriate recommendations ### Exchange Rate Arrangement and Payments System - Exchange regime classification: stabilized - Official exchange rate expressed in riels per U.S. dollar; applies to all official external transactions conducted by the central government and state enterprises, and used for accounting purposes by the NBC - Rate determination: determined by the foreign exchange market, with the official rate adjusted to be within 1 percent of the market rate on a daily basis - Article VIII obligations accepted on January 1, 2002 (Sections 2, 3, and 4) - Cambodia maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions ### Article IV Consultation - Consultation cycle: standard 12-month Article IV - Last Article IV consultation discussions: Phnom Penh during September 9–23, 2009 - Executive Board conclusion date: November 18, 2009 (staff report: IMF Country Report 09/325) ### Technical Assistance - Current focus areas: bank supervision, monetary operations, public financial management, customs administration, and macro-financial statistics - Delivery modes: resident advisor at the NBC, peripatetic experts, and short-term visits from headquarters ### Resident Representative - Resident representative office closed: October 1997; re-opened: October 1999 - Headed by an IMF Resident Representative until June 2010 - Since June 2010, the IMF’s Resident Representative for Indonesia, Mr. Milan Zavadjil, has also assumed responsibilities for the Cambodian IMF office --- ### ANNEX II. CAMBODIA: WORLD BANK-IMF COLLABORATION — Overview and Key Areas of Cooperation - Country team leads: - World Bank: Mr. Mathew Verghis (Lead Economist, EASPR) - IMF: Mr. Olaf Unteroberdoerster (IMF Mission Chief for Cambodia) - Teams maintain a close working relationship and active dialogue on macroeconomic and structural issues ### Recent Key Areas of Cooperation and Coordination - (i) Macroeconomic policy advice: - Joint stance adopted on 2009 national accounts (IMF/Bank best estimates suggest a contraction of GDP; Cambodia National Institute of Statistics suggests growth of 0.1 percent) - Regular sharing of information outside missions; exchange of institutional views on macro developments - Bank staff share monthly fiscal monitor and quarterly review of macroeconomic developments; IMF staff share policy notes and mission preparatory documents - (ii) Financial Sector Reform/TA and FSAP: - Close collaboration during March 2010 FSAP - Joint representation in 2009 to appraise authorities on FSAP - Expected deployment of technical assistance aligned with FSAP recommendations, implying continued close coordination - (iii) Public Financial Management and Tax and Customs Administration Reform: - Both institutions working to strengthen coordination and share work where possible - (iv) Article IV Consultations: - IMF Article IV consultations regularly share macroeconomic data with the World Bank and hold working sessions to reconcile datasets - Closest collaboration on the Debt Sustainability Analysis (a joint product); World Bank staff invited to and do participate in key meetings - (v) Structural reforms: - Joint work and shared views on structural reforms for a better investment climate, rural development, and de-dollarization ### Institutional and Operational Considerations - Departure of the resident representative at end-June 2010 tests partnership modality - IMF maintains an office in Phnom Penh with local staff; Resident Representative (Mr. Milan Zavadjil) based in Indonesia and visits Cambodia every six to eight weeks - Continued excellent collaboration, but adjustments required—particularly for IMF involvement in the Public Financial Management Reform Program ### Shared Macro and Structural Reform Priorities - Promoting long-term growth and diversification: - Recognition of vulnerabilities from lack of diversification and weaker rural development progress - Sustaining the recovery: - As of September 2010 (IMF Article IV consultation concluded), recovery is well under way; needs sustaining via appropriate fiscal consolidation and continued management of banking sector risks - Increasing fiscal space: - Better enforcement of revenue policy is a priority - Additional fiscal space should be targeted to areas that increase growth potential (e.g., infrastructure related constraints) or target the most vulnerable (e.g., implement the recently developed Social Safety Net strategy) - Importance of public sector compensation reform, if planned in a coherent fiscal framework and accompanied with necessary human resource reforms - Strengthening the banking system: - FSAP recommendations to tighten bank supervision and develop a crisis resolution framework to safeguard banking system stability and support economic growth - Improving governance: - Emphasis on governance to improve service delivery and business environment - In Article IV consultations, the role of EITI and the recently-adopted Anti-Corruption Law were stressed - Commitment: The teams are committed to continue close cooperation going forward *Source: _cr1145 - ANNEX I. CAMBODIA: FUND RELATIONS* ### Appendix 1. Cambodia: Joint Managerial Action Plan, September 2010–August 2011 ### Appendix 1. Cambodia: Joint Managerial Action Plan, September 2010–August 2011 ### A. Mutual information on relevant work programs - The World Bank’s work program in the next 12 months - Macroeconomic monitoring - Semi-annual updates (regional): October 2010; April 2011 - Recent economic developments (slides): Approx once per quarter - Growth and diversification: Policy notes on “growth beyond the crisis,” “tax incentives,” “special economic zones,” and “social and poverty impact of the crisis”: October / November 2010 - Financial sector - Risk sharing facility (joint IDA / IFC): December 2010 - FSAP follow up: September 2010 - Public sector management - PFM reform program: September 2010 - Integrated Fiduciary Assessment and Public Expenditure Review (IFAPER): December 2010 - Options for compensation reform (background papers): March 2011 - Trade - Trade Facilitation and Competitiveness Program (including customs automation) and Trade Development Support Program: November 2010 - The IMF’s work program in the next 12 months - Macroeconomic policy analysis and advice - Article IV consultation and staff visits: Third quarter 2011 - Policy notes on request: Ongoing - Technical assistance - Fiscal: Cash Management; Government accounting; Customs reform - Financial sector: Ongoing work for FSAP; Resident banking supervision advisor; Technical Assistance ### B. Agreement on joint products and missions - Joint products in the next 12 months - Debt sustainability analysis: 2010 Article IV Consultation — During Article IV Consultations - FSAP: Ongoing until the Board in late October 2010 ### Annex III. Cambodia: Relations with the Asian Development Bank (As of August 31, 2010) - Historical approvals and grants (1992 through August 31, 2010) - Total approved funding: $1,254.7 million - 49 loan projects of $1,064.8 million with low interest - 13 Asian Development Fund (ADF) grants of $189.9 million ($42.0 million in 2005; $7.8 million in 2006; $37.0 million in 2007; $30.3 million in 2008; and $72.8 million in 2009) - Completed to date: 33 loan projects for a total of $732.9 million and two ADF grants of $14.5 million - Active portfolio sector composition and amounts (as of August 31, 2010) - (i) agriculture and natural resources $123.4 million - (ii) education $76.6 million - (iii) energy $64.3 million - (iv) finance $10.0 million - (v) health, nutrition, and social protection $9.0 million - (vi) industry and trade $15.6 million - (vi) law, economic management, and public policy $6.1 million - (viii) transport and communication $163.3 million - (ix) water supply, sanitation, and waste management $39.0 million - AsDB strategic focus - Overarching goal: sustainable poverty reduction - CPS 2010–13 guided by Strategy 2020 to support NSDP Update 2009–13 - COBP 2009–12 priorities: agricultural and rural development; private sector development; governance and capacity development; regional economic integration in the GMS - Sectoral interventions (high level) - Agriculture and rural development: Tonle Sap basin, water resources, irrigation assets, agriculture extension, crop diversification, rural roads connectivity, smallholder development, rural water supply and sanitation, local community management capacity - Private sector development: competition policy; regulatory efficiency; investment climate; trade policy reforms and trade facilitation (customs, SPS standards); improving competitiveness at GMS level - Financial sector: improving financial intermediation; enhancing resilience; promoting good governance; improving efficiency - Education: equitable access to quality secondary education and technical and vocational education and training - Governance and capacity building: programmatic PFM reform, support to budget preparation and execution, financial management and reporting, procurement, internal audit capacities, strengthen National Audit Authority, support decentralization and de-concentration reforms, support anti-corruption law implementation (passed April 2010) ### AsDB: Loan/Grant Commitments and Disbursements to Cambodia, 1992–2010 (In millions of U.S. dollars, as of August 31, 2010) - Annual figures (Loan/Grant Approvals | Contract Awards/Commitment | Disbursements) - 1992: 67.7 | 0.0 | 0.0 - 1993: 0.0 | 4.4 | 5.4 - 1994: 28.2 | 35.9 | 12.2 - 1995: 45.1 | 28.1 | 35.9 - 1996: 105.0 | 15.3 | 32.1 - 1997: 0.0 | 41.5 | 10.7 - 1998: 40.0 | 29.1 | 29.3 - 1999: 88.0 | 17.0 | 26.2 - 2000: 109.6 | 114.4 | 50.8 - 2001: 75.2 | 40.7 | 48.3 - 2002: 116.5 | 64.4 | 78.9 - 2003: 98.3 | 61.9 | 73.3 - 2004: 65.0 | 62.4 | 76.7 - 2005: 52.0 | 96.4 | 84.5 - 2006: 69.8 | 44.7 | 55.8 - 2007: 72.1 | 85.8 | 62.1 - 2008: 84.1 | 141.3 | 138.9 - 2009: 144.5 | 52.3 | 84.6 - 2010 (Projected): 156.8 | 90.2 | 86.0 - TOTAL: 1,417.9 | 1,025.8 | 991.7 - Notes from table - 2005: $10 million loans and $42 million grants approved in 2005. - 2006: $62 million loans and $7.8 million grants approved in 2006. - 2007: $35.1 million loans (including $8 million OCR loans to private sector) and $37 million grants approved in 2007. - 2008: $53.8 million loans and $30.3 million grants approved in 2008. - 2009: $71.7 million loans and $72.8 million grants approved in 2009. - 2010 (Projected): $95.0 million loans and $61.8 million grants are expected to be approved during third and fourth quarters of 2010. ### Annex IV. Cambodia: Statistical Issues (As of September 30, 2010) - I. Assessment of Data Adequacy for Surveillance - General: Data provision is broadly adequate for surveillance. Extensive TA from IMF, UNDP, AsDB, World Bank, Japan, and Sweden has led to substantial capacity improvements. Shortcomings in macroeconomic data still hamper timely and comprehensive analysis. - National Accounts - National Institute of Statistics improving consistency with SNA 1993, expanding annual aggregates, producing quarterly series since June 2005 with IMF TA. - Quality of GDP estimates hampered by lack of comprehensive and reliable source data on production and expenditure basis. - Authorities have not yet published the 2009 national accounts. - Price statistics - New consumer price index series introduced January 2009; geographical coverage limited to Phnom Penh. - Statistics Sweden providing TA on price statistics, including compiling a production price index. - Government finance statistics - Ministry of Finance and Economy implementing reforms to government accounting system and budgetary nomenclature since 2007 based on GFSM 2001 with IMF TA. - IMF TA in April 2008 assisted establishing a bridge between the government’s new chart of accounts (COA) and GFSM 2001 classifications. - Use and coverage of the COA limited and not fully integrated with disbursement of external loans and grants, budget reserve fund, and capital expenditures. - Monetary and financial statistics - National Bank of Cambodia compiles central bank and other depository institutions balance sheets and surveys per the IMF Manual. - Since August 2005, NBC reports monthly monetary and financial statistics to STA using SRFs. - NBC received TA during the FSAP on compilation of FSIs; now compiles monthly core FSIs and shares them with IMF staff irregularly. - Non reliability and inconsistency of data reported by banks pose challenges to interpretation of FSIs. - External sector statistics - More work needed to improve balance of payments statistics. - Customs data have coverage and valuation problems: use of reference prices; limited recording of non dutiable imports; underreporting of re-exports; weaknesses in customs controls. - Enterprise transactions (imported services, income payments, portfolio investment abroad) are excluded or underreported. - FDI relies excessively on approvals and is believed to be large. - Gaps in external debt statistics: stock of public and publicly-guaranteed debt by maturity; bilateral donor disbursements; external debt service. - Gaps in official transfers (e.g., grants) and no data available for private external debts. - II. Data Standards and Quality - Cambodia participates in the IMF’s General Data Dissemination System - No data ROSC are available - III. Reporting to STA (Optional) - Cambodia sends regular data reports to STA for publication ### Cambodia: Table of Common Indicators Required for Surveillance (As of September 30, 2010) - Selected indicators with latest observation and reporting frequency - Exchange Rates: Date of latest Observation Sept. 2010 | Date Received Sept. 2010 | Frequency of Data D | Frequency of Reporting D | Frequency of Publication W - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Sep. 2010 | Sep. 2010 | Biweekly | Biweekly, 4 week lag | N/A - Reserve/Base Money: Aug. 2010 | Sep. 2010 | M | M, 4–6 week delay | M - Broad Money: Aug. 2010 | Sep. 2010 | M | M, 4–6 week delay | M - Central Bank Balance Sheet: Aug. 2010 | Sep. 2010 | M | M, 4–6 week delay | M - Consolidated Balance Sheet of the Banking System: Aug. 2010 | Sep. 2010 | M | M, 4–6 week delay | M - Interest Rates: Aug. 2010 | Sep. 2010 | M | M, 4–6 week lag | M - Consumer Price Index: Aug. 2010 | Sep. 2010 | M | M, 2–4 week lag | M - Revenue, Expenditure, Balance and Composition of Financing — General Government: Aug. 2010 | Sep. 2010 | M | M, 4–6 week lag | M - Revenue, Expenditure, Balance and Composition of Financing — Central Government: Aug. 2010 | Sep. 2010 | M | M, 4–6 week lag | M - Stocks of Central Government and Central Government-Guaranteed Debt: Dec. 2009 | Sep. 2010 | A | A, 6 month lag | A - External Current Account Balance: Q2, 2010 | Sep. 2010 | Q | Q, 2 month lag | Q - Exports and Imports of Goods and Services: Q2, 2010 | Sep. 2010 | Q | Q, 2 month lag | Q - GDP/GNP: Dec. 2008 | Jun. 2009 | A | A, 6 month lag | A - Gross External Debt: Jun. 2010 | Sep. 2010 | M | M, 4– 6 month lag | A - International Investment Position: Aug. 2010 | Sep. 2010 | M | Q, 2 month lag | M ### Statement by the IMF Staff Representative (October 28, 2010) - Economic recovery and trade - Pick-up in economic activity continued through September and evident in real growth of exports of garments and of key imports including cars, gasoline, and motorcycles. - Construction-related imports remain weak. - Tourist arrivals through August are up 16 percent (y/y), with air arrivals up 14 percent. - Credit growth in September: 23 percent (y/y). - Both gross official reserves and the exchange rate have remained virtually unchanged. - Inflation - Headline inflation eased in the third quarter of 2010 (to about 2 percent y/y), driven by lower food prices, in part reflecting seasonal factors. - 2011 draft budget (approved by the Council of Ministers on October 15, 2010; final parliamentary approval expected in mid-December) - Overall spending would be kept at ¼ percent of GDP below the staff projection. - Revenues forecast: ½ percent of GDP below staff projection. - Overall deficit would decline by only ¼ percent of GDP (staff projected ½ percent). - Budget contains larger-than-expected capital spending and social priority outlays (each ¼ percent of GDP above staff projection), implying a larger compression of nonpriority current spending than staff considered likely. ### Cambodia: Volume of Trade to September (Year on year percent change) — Selected items (two-column listing suggests 2009 and 2010 changes) - Exports - Garments: -8.0 | 27.9 - Imports - Cigarettes: 2.6 | 7.6 - Construction material: -27.6 | 1.9 - Cement: -16.3 | -8.8 - Steel: -19.9 | 11.3 - Motorcycles: -60.5 | 85.0 - Cars: -41.1 | 16.7 - Gasoline: 1.3 | 17.2 ### Public Information Notice (PIN) No. 10/158 — IMF Executive Board Concludes 2010 Article IV Consultation with Cambodia (December 14, 2010) - Background and assessment - Pre-crisis: Real GDP growth averaged over 9 percent during 2000–07. - Global crisis impact: Preliminary estimates suggest growth fell some 10 percentage points below its pre-crisis average in 2009. - Fiscal response in 2009: Overall fiscal deficit increased to over 8 percent of GDP in 2009, up by more than 5 percentage points over 2008. - Deficit mostly financed by concessional loans and grants; domestic financing nearly 2 percent of GDP in 2009 (first time since 2003). - NBC policy response: Reduced reserve requirements (from 16 to 12 percent) and introduced an overdraft facility; banks raised deposit rates, contributing to a significant rise in liquidity in the banking system. - Recovery signals: Garment exports and tourist arrivals, notably by air, are bouncing back, both growing between 10 to 20 percent (y/y) in the second quarter of 2010. *Source: Appendix 1. Cambodia: Joint Managerial Action Plan, September 2010–August 2011 (IMF staff report materials).* ### 2010. Construction activity, however, appears to remain sluggish with growth of most related ### _cr1145 - 2010. Construction activity, however, appears to remain sluggish with growth of most related ### Macroeconomic developments and outlook - Economic activity: staff projects growth to reach 4½–5 percent in 2010. Growth is expected to gradually return to potential of about 6–7 percent over the medium term. - Sectoral notes: - Construction activity remains sluggish with growth of most related imports still negative. - A late start of the rainy season may dent agricultural output growth. - Garment exports to the U.S. and Europe account for 40 percent of total goods and services exports. - Inflation: consumer price inflation rose to an average 7 percent in Q1 2010, from about -½ percent on average in 2009; staff projects the headline CPI index to rise 4 percent on average in 2010. - Credit and liquidity: credit growth reached 23 percent (y/y) in August, from 6½ percent at end 2009, amid ample liquidity in the banking system. - External sector: - After narrowing in 2009, the current account deficit is likely to widen to about 7 percent of GDP (including official transfers) in 2010 on strengthening domestic demand. - Official reserves have risen modestly to about 3½ months of import cover. - The riel has depreciated somewhat against the U.S. dollar in recent months. ### Risks and medium-term external outlook - Near-term risks are tilted to the downside due to: - Fragility of the global recovery and Cambodia’s narrow export base heavily reliant on U.S. and European markets. - Limited fiscal policy space and financial system weaknesses (shortcomings in banking supervision, enforcement of regulations, uneven credit risk management and data reporting by banks, and a high degree of dollarization). - Medium-term scenario elements: - The current account deficit (excluding official transfers) rises early in the recovery to about 13½ percent of GDP in 2010, and would gradually decline to about 8½ percent of GDP in 2015, partly reflecting increasing domestic hydro-power supply. - The deficit is expected to remain fully financed through grants, official external financing, and foreign direct investment. - Better-than-expected returns on medium-term investments in the power sector and rural infrastructure could be significant upside. ### Executive Board priorities and policy recommendations - Fiscal policy: - Prudent fiscal policy remains critical for maintaining macroeconomic stability. - Directors encouraged continued fiscal consolidation; staff and authorities expect consolidation to meet the 2010 budget target. - Stepped-up revenue mobilization is crucial: improve tax administration, enlarge the tax base, and prudent borrowing policy. - Strengthen public financial management to ensure effectiveness of priority social and infrastructure spending. - Monetary and financial policy: - In light of large liquidity overhang, authorities should be ready to remove monetary easing bias to preempt pressures on financial stability. - Greater monetary independence requires a market-based strategy of de-dollarization and carefully sequenced measures, including development of an interbank money market. - Implement high-priority FSAP recommendations to enhance financial system surveillance, supervisory and regulatory frameworks, and crisis management capacity. - Develop safety nets, upgrade and enforce legal frameworks to address systemic risk and limit potential fiscal costs. - Structural and growth-enhancing policies: - Promote private sector-led economic diversification and strengthen the business environment. - Renewed emphasis on agricultural development and rural infrastructure investment to broaden growth and reduce poverty. - Improve competitiveness through trade facilitation, border efficiency, infrastructure, and human capital (vocational training to produce skilled workforces). - Authorities commit to implement FSAP FSSA recommendations with technical assistance, prioritizing bank supervision capacity, liquidity forecasting and monitoring, legal frameworks for supervisory coordination, crisis management, and laws/regulations improvements. ### Authorities’ assessment and policy actions (statement by Cambodian authorities) - Growth and external: - Authorities agree with staff’s growth projection of 4.5–5 percent for 2010 and expect medium-term recovery toward pre-crisis levels. - The current account deficit (including official transfers) is projected to increase to 7 percent of GDP in 2010 from 5.2 percent in 2009; the increase driven mainly by trade deficit rising to 18 percent of GDP. - Authorities expect inflation to remain below 5 percent at end-2010, while noting risks from international food and commodity price increases. - Fiscal stance: - The 2010 stimulus package helped boost the economy; overall performance expected to meet 2010 Budget Law targets. - Authorities commit to fiscal consolidation, with most consolidation to come from the revenue side but limited ability to cut social spending and ongoing public investment projects. - Revenue collection is expected to exceed target; authorities request technical assistance to improve revenue administration and broaden the tax base. - Planned cuts in wage bill are on track. In the medium term, current expenditure will be kept at the same rate as a percentage of GDP. - Expenses related to agriculture, education, and health will be increased by about 10 percent each. Capital expenditure will increase by about 15 percent in 2011, with expected funding primarily from external sources. - Caution on new concessional borrowings; reliance on assistance and grants from development partners to help achieve MDGs by 2015. - Monetary policy and exchange rate: - Authorities emphasize exchange rate stability in a highly dollarized economy; since May, the National Bank of Cambodia injected over US$ 40 million to stabilize the foreign exchange market. - Monetary easing has been withdrawn; policies to remain unchanged while monitoring credit quality and liquidity overhang. - Plans to set up money market instruments (certificate of deposits and monetary stabilization bonds) to promote interbank markets and improve monetary policy efficiency. - Reserve requirement ratios remain unchanged at 12 percent on foreign currency deposits and 8 percent for domestic currency deposits. - As deposits increase, broad money and credit to the private sector are expected to increase at a similar annualized rate of over 20 percent. - Financial sector: - Banking sector total assets currently stand at about half of GDP. - Over 90% of banks are well recapitalized; authorities enforcing remainder to comply with regulation. - AML/CFT Law promulgated in 2008; Financial Intelligence Unit established under the central bank with multi-agency Board. - Authorities committed to implementing FSAP recommendations; requested IMF technical assistance for capacity building and reform implementation. - Structural reforms: - Measures in place to develop agriculture, agro-processing, SMEs, and diversify exports; constraints include lack of capital investment, skilled workforce (especially middle management), and institutional capacity. - Domestic hydro energy production expected to come on stream by 2012, improving price competitiveness. - Anti-corruption Law passed and Anti-Corruption Body established. ### Key statistics (selected figures as reported) - GDP at constant prices: 2010 Proj. 4.8 (annual percent change) - Inflation (CPI) (annual average): 2010 Proj. 4.0 - Inflation (end-year): 2010 Proj. 4.5 - Gross national saving (percent of GDP): 2010 Proj. 11.5 - Gross fixed investment (percent of GDP): 2010 Proj. 18.5 - Government investment (percent of GDP): 2010 Proj. 7.4 - Revenue (percent of GDP): 2010 Proj. 13.0 - Expenditure (percent of GDP): 2010 Proj. 18.8 - Overall budget balance (- deficit) (percent of GDP): 2010 Proj. -5.9 - Foreign financing (net) (percent of GDP): 2010 Proj. 5.5 - Domestic financing (net) 2/ (percent of GDP): 2010 Proj. 0.4 - Broad money (annual percent change): 2010 Proj. 22.7 - Private sector credit (annual percent change): 2010 Proj. 28.5 - Exports (in millions of U.S. dollars): 2010 Proj. 4,563 - Imports (in millions of U.S. dollars): 2010 Proj. -6,679 - Current account balance (in percent of GDP): 2010 Proj. -7.0 - Gross official reserves (in millions of U.S. dollars) 3/: 2010 Proj. 2,550 - Reserves (in months of prospective imports): 2010 Proj. 3.6 - Public external debt (in millions of U.S. dollars): 2010 Proj. 3,514 - Public external debt (in percent of GDP): 2010 Proj. 29.9 - Nominal GDP (in billions of riels) 2010 Proj. 47,362 - Nominal GDP (in millions of U.S. dollars) 2010 Proj. 10,871 - Exchange rate (riels per dollar, period average): 2009 4,125; 2010 ... *Source: IMF staff report and authorities’ statement as provided in the content unit.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1145.pdf_