## _cr1433 - 1. Financial Sector Developments and Risks ## Source details **Canonical URL:** [_cr1433 - 1. Financial Sector Developments and Risks](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1433.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1433.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1433.pdf.json) --- ### Outlook and near-term risks: growth, inflation, credit, and external position - Growth projections and drivers - Real GDP growth expected to stay at 7 percent in 2013. - Growth projected to pick up to 7¼ percent in 2014. - Medium-term growth projection: 7½ percent with improvements in infrastructure, competitiveness, and investment climate. - Key drivers: robust exports (garments with preferential EU access), tourism, real estate, construction, and strong FDI (including factories relocating from China and Vietnam). - Recent shocks: sluggish global recovery, recent floods, slowdown in activity during the election period. - Inflation, credit, and financial deepening - Inflation projected to stay around 3–4 percent during 2013–14. - Private sector credit growth about 30 percent (y/y) on average in the last three years. - Credit-to-GDP ratio nearly doubled to over 40 percent. - Contributing factors: entry of new banks increasing bank flows from abroad; heightened competition; falling lending rates and interest rate spreads. - External stability and reserves - Current account deficit including official transfers expected to stay flat at around 8½ percent of GDP in 2013. - Current account projected to decline to 5½ percent of GDP over the medium term. - Gross official reserves stood at US$3.6 billion in November, about 3½ months of prospective imports. - Foreign currency deposits are more than 1½ times of gross official reserves. - Real effective exchange rate broadly flat since 2008 and broadly in line with fundamentals. - Reserve adequacy estimates range from 2 to 10 months of imports depending on the cost of holding reserves. - Immediate fiscal statistic - Fiscal deficit, excluding grants, in 2013 is expected to narrow further by about ½ percentage points (ppt) of GDP. - Stock of government deposits projected to decline slightly to around 4¾ percent (of GDP). ### Risks and spillovers - External and regional risks - Protracted economic and financial volatility in emerging markets: high likelihood; potential impact medium. - Exit from unconventional monetary policy could trigger capital outflows and increase dollar funding costs, possibly leading to a stop in foreign bank financing. - Slow growth in Europe could reduce garment exports; impact mitigated by preferential EU access. - Slower growth in China could reduce FDI and tourism to the region, affecting Cambodia indirectly. - Domestic risks - Continued rapid credit growth and proliferation of real estate financing: medium likelihood; potential impact high. - Risks: deterioration of asset quality, increased financial sector vulnerabilities and liquidity risks, decline in confidence during a downturn. - High degree of dollarization limits central bank lender-of-last-resort capacity. - Labor market instability (continued incidences of labor strikes): medium likelihood; potential impact high. - Extreme weather conditions (drought or flood): medium likelihood; potential impact medium to high. - Slow progress in fiscal reforms: medium likelihood; potential impact high. - Global oil price shock (continued geopolitical events in the Middle East): low likelihood; potential impact medium. - Systemic vulnerabilities highlighted - Fragile confidence in banking sector following large deposit withdrawals during the election. - High dollarization and declining reserve coverage in terms of foreign currency deposits reduce effectiveness of monetary policy and lender-of-last-resort capacity. ### Policy stance, contingency measures, and authorities' views - Fiscal policy and limited policy space - Policy space to support growth is limited because fiscal consolidation has been slower than expected since 2010. - In case of adverse shocks, limited room for additional spending should be allocated to high-impact expenditures on education, health, and infrastructure. - Authorities broadly agreed with staff views on exchange rate assessment, outlook, risks, and limited policy space; authorities remained cautiously optimistic that flood impact would be less than projected and expected GDP growth to exceed 7 percent in 2013. - Monetary and financial sector contingency - High dollarization limits monetary policy effectiveness. - Declining reserve coverage in terms of foreign currency deposits highlights limitations on the National Bank of Cambodia’s (NBC) lender-of-last-resort capacity. - If financial sector risks materialize, NBC should use available lender-of-last-resort capacity and expedite implementation of the crisis management framework, including enhancing bank resolution powers. ### Policy discussion — Maintaining the momentum of fiscal consolidation - Recent fiscal context and wage bill - Buoyant domestic demand and revenue collection improved the fiscal position; 2013 budget revenue targets reachable. - Increase in civil service salaries in September 2013 (the lowest salaries increased up to the minimum wage of US$80 per month) had a limited fiscal impact (0.1 percent of GDP). - The 2014 budget envisages an additional 25 percent increase in the wage bill, particularly for low salary bands. - Large fiscal cost (½ percent of GDP) would raise Cambodia’s wage bill to 5½ percent of GDP in 2014. - Recommendation: further salary increases should be part of broader civil service reform to avoid jeopardizing fiscal consolidation and to aim to contain the wage bill to around 5 percent of GDP over the medium term. - Authorities established two working groups for wage and civil service reforms to contain the wage bill while improving capacity and accountability. - Rebuilding fiscal buffers and revenue mobilization - Targeting an increase in government deposits is appropriate; room exists to increase envisaged savings (Riel 80 billion) further. - Additional savings of about Riel 170 billion (less than ¼ ppt of GDP) would be required to maintain government deposits broadly constant in terms of GDP. - Suggested revenue measures: increase excise taxes and expand their base, rationalize vehicle tax, collect more tax debt, expand the tax net, and strengthen customs administration (including combating smuggling). - Authorities concurred there is room for additional revenue and reaffirmed commitment to rebuilding fiscal buffers. ### Revenue Mobilization Strategy (RMS) — objectives and measures - Government commitment and intended fiscal impact - Government commitment: raise domestic revenue by ½ ppt of GDP annually over the medium term. - Fiscal impact under unchanged overall current spending (as percent of GDP): - Fiscal deficit (excluding grants) could be reduced by about 3 ppt of GDP from 2013 to 2018. - Government deposits could be replenished to about 5½ percent of GDP by 2018. - Public external debt could be limited to less than 30 percent of GDP. - Purpose: provide resources for currently donor supported development spending (including health and education) in light of expected decline in grants. - RMS adoption timing: essential to adopt the RMS in 2014. - RMS three-pronged approach and priorities - (i) improving revenue administration, - (ii) implementing fair and efficient tax policies, - (iii) strengthening governance. - Near-term priorities agreed with staff: - Reform excise taxes and the VAT. - Expand the base of the formal (nonestimated) tax regime. - Rationalize exemptions and tax holidays. - Immediate administrative actions planned: - Set up taxpayer services. - Modernize IT systems. - Strengthen capacity of tax officers. - Improve governance to start a virtuous cycle. - Medium-term measures: - Introduction of income tax. - Expansion of property tax base. - Better administration of nontax revenues. ### Safeguarding fiscal space — PPPs and contingent liabilities - Contingent liabilities from PPPs require careful management to contain fiscal risks. - Latest estimate: size of investment projects around 25 percent of GDP in 2012. - Institutional responses: - MEF established an investment department as a central PPP-monitoring unit. - MEF established a debt management department to manage contingent liabilities and associated risks. - Authorities’ planned actions: - Continue strengthening institutional capacity, including seeking further TA. - Adopt a ceiling on PPP guarantees. - List all contingent liabilities and guarantees in annual budget laws to improve fiscal transparency. ### Public Financial Management (PFM) priorities - Chart of accounts: adoption of a new chart of accounts with improved budget classifications in 2015 should pave the way for FMIS implementation. - FMIS: Financial Management Information Systems is being prepared; successful implementation depends on groundwork. - Immediate PFM priorities: - Expedite development of an effective internal audit mechanism for FMIS rollout. - Roll out program budgeting and relocate decision making and accountability to ten line ministries. - Strengthen donor coordination for timely reporting of donor support to improve planning and monitoring of capital spending. - Authorities’ commitments: - Requested continued TA support for PFM reforms. - Plan to fully implement program budgeting starting with the education sector to improve spending efficiency. ### Improving monetary policy effectiveness and key vulnerabilities - Main monetary tool: reserve requirements; raised in September 2012 by ½ ppt to 12½ percent on foreign currency deposits. - Key vulnerabilities - Bank funding from abroad not subject to prudential limits and escapes monetary control. - Large deposit withdrawals during the election (10 percent of total deposits) reduced banks’ excess reserves substantially; deposits started to return in October. - High degree of dollarization and absence of an interbank market limit NBC’s control and lender-of-last-resort capacity. - Recent financial soundness indicators do not reveal immediate concern, but risks arise from a crowded banking system, rapid credit growth, increasing foreign bank funding, greater real estate exposure, and stretched supervisory capacity. - Recommendation: continue implementing 2010 FSAP recommendations and ongoing TA; strengthen AML/CFT regime. ### Multi-pronged macro-financial policy recommendations - Strengthen supervision of liquidity risks - Improve monitoring of truly usable liquidity buffers (broad LAR definition overstates liquidity). - Complement supervision with contingency plans by banks and NBC, expedite planned revision of standing facilities, and improve liquidity forecasting. - Strengthen macroprudential measures - Fully enforce reserve requirements to include bank funding from abroad in the reserve base. - Monitor maturity mismatches closely for roll-over risks. - If required reserve expansion insufficient, consider introducing LTD ratio limits and higher risk provisioning for new loans, especially in high risk sectors. - Monitor real estate sector and shadow banking - Strengthen reporting requirements for all construction activity and real estate sales. - If price/activity trends intensify, NBC could introduce LTV limits in fast growing segments. - Strengthen regulation of shadow banking activities by real estate developers, including licensing and reporting of funding sources. ### Financial sector developments and key indicators (Box 1 summary) - Financial deepening and market dynamics - Credit-to-GDP ratio nearly doubled in last three years, surpassing peers and diverging from sustainable past trends. - Intensifying competition increased banks’ risk appetite, especially among smaller and mid-sized banks. - Financial access limited to about 12 percent of the population — concentration risks. - Foreign banks entering since 2011 contributed to more than one-third of total new lending in 2012, often funded from abroad (tripled in 2012), and such funding is not subject to reserve requirements. - Liquidity and funding metrics - Excess reserves declined from peak of 30 percent (mid-2010) to around 10 percent in recent months. - Loan-to-deposit (LTD) ratio trended upwards to over 100 percent. - Excess reserves and LTD dynamics amplify liquidity and roll-over concerns. - Real estate and shadow banking - Land prices have increased by over 10 percent (yoy). - Loans to construction and real estate grew by over 44 percent (yoy) in September. - Construction approvals for residential units quadrupled in 2012. - Loan-to-value (LTV) ratios drifting upward from 60–70. - Shadow banking: proliferation of real estate financing by developers with obscure funding sources beyond regulatory oversight. - Mitigation measure - Swap agreement with the Bank of International Settlements provides US$200 million to respond to liquidity shocks. ### Interbank and foreign exchange markets development - NBC introduced negotiable certificates of deposit (NCDs) in USD and KHR; maturities range from 2 weeks to one year with interest rates equal to those on NBC’s deposit facilities. - Early uptake limited due to deposit withdrawals and reportedly unattractive pricing; consultations needed to improve attractiveness, including differentiating pricing from NBC’s deposit facility. - Policy suggestions: - Encourage state-owned enterprises to source foreign currency from commercial banks instead of NBC to catalyze market development. - NBC to conduct a dollarization survey to inform policies promoting local currency usage. - Authorities’ view: NCDs will take time to be widely adopted; exchange rate stability remains important for domestic currency demand; establishment of interbank and foreign exchange markets seen as prerequisite to address dollarization in medium term. ### Risk-based supervision, supervisory capacity, and crisis management - Supervision and capacity - By October 2013, NBC completed on-site inspection of 13 banks: five rated “satisfactory”, eight “fair”. - Supervisory priorities: focus on emerging risks; monitor LTV ratios, underwriting and valuation standards; monitor concentration, related party, credit risks, and nonresident loans and deposits (including AML/CFT implications). - Rapid banking expansion (including three new bank licenses in 2012) strains capacity. - 2010 FSAP recommendation: impose moratorium on new bank licensing remains appropriate; authorities prefer continued tight stance on new licensing and encouragement of mergers rather than a formal moratorium. - Crisis prevention and management - Institutional steps: NBC, MEF, and SECC signed an MoU establishing a policy-level Working Group (WG) and a technical Core Team (CT). - Recommended two-track, time-bound approach: - CT to explore joint vulnerability exercises and information sharing needs. - WG to clarify responsibilities of agencies in preventing and resolving crises and to develop contingency plans. - Additional recommendations: expedite improvements to the Prompt Corrective Action framework; sign a second MoU on crisis resolution. - Authorities’ actions: agreed on urgent need, plan to discuss a draft memorandum on crisis management with TA support from the World Bank. ### Promoting competitiveness, human capital, and inclusive growth - Competitiveness and diversification - Cambodia’s competitiveness has improved but remains concentrated in low value-added garment and agricultural products due to relatively low wages and productivity. - Continued improvements needed in human capital, infrastructure, and the business climate. - Ministry of Commerce reform agenda to reduce regulatory burden and improve governance (including strengthening anti-corruption and AML frameworks). - Human capital and education spending - Public spending on education broadly constant at about 2½ of GDP for the past five years. - Near-term priority: improve efficiency and reallocate spending within the budget envelope. - Medium-term consideration: establishing a national training fund, contingent on successful public finance reforms. - Data and statistics - Improve the quality and timeliness of economic and financial data. - Start collecting data on private sector debt given increasing foreign funding of the private sector. ### Debt sustainability, DSA updates, and contingent liabilities - DSA updates and key assumptions - Discount rate revised upward to 5 percent from 3 percent. - Macroeconomic assumptions broadly similar to 2012 DSA; Cambodia assumed to issue domestic debt over the long term. - External public debt including arrears: around US$4.5 billion or 32 percent of GDP (19 percent in NPV terms) at end-2012. - Share of bilateral debt increased to 63 percent of total external public debt in 2012; China: more than 50 percent of total bilateral debt stock and about 80 percent of bilateral debt disbursement during the past three years. - Cambodia remains in arrears to the Russian Federation and the U.S.: nearly 20 percent of total debt or 6 percent of GDP; arrears not being serviced. - Baseline DSA projections and fiscal framework - GDP growth: expected at 7 percent in 2013 and projected to gradually increase to 7½ percent by 2018; long term projected to moderate to 7 percent. - Inflation: 3‒4 percent during 2013‒14; medium term expected to average 3 percent. - Current account deficit including official transfers: around 8½ percent of GDP in 2013; medium-term projected to decline to 5½ percent of GDP. - Gross official reserves projected to remain at around 3½ months of prospective imports. - External debt disbursement projected to average about US$500 million annually during 2013‒18 (about 2½ percent of GDP on average). - Debt-to-GDP ratio projected to gradually decline to 29 percent by 2018. - Domestic revenue projected to increase by ½ percent of GDP annually over the medium term. - Fiscal deficit excluding grants projected to decline from about 6 percent of GDP in 2013 to 2¾ percent in 2018. - Contingent liabilities and downside risks - Total investment of PPP projects estimated around $3.2 billion (about 25 percent of GDP in 2012). - If one in ten projects fails, an average of 2½ percent of GDP could be added to the debt stock. - Fiscal cost to support the financial sector during a banking crisis: median direct fiscal cost in emerging market economies estimated at 11.5 percent of GDP. - Ongoing work (with World Bank TA) to estimate payment obligations and size of contingent liabilities; value-at-risk approach being considered. - DSA conclusion and policy implications - Conclusion: Cambodia’s debt distress rating remains low with all debt burden indicators projected to remain below respective thresholds. - Policy implications: - Preserve macroeconomic stability. - Diversify the economy and exports. - Implement revenue mobilization strategy and continue fiscal consolidation to reduce vulnerability to shocks. - Strengthen monitoring and management of contingent liabilities, especially PPP-related power projects. ### Selected key statistics and projections (selected exact figures) - GDP growth: 7.0 (2013), 7¼ percent (2014), 7½ percent (medium term target). - Inflation: 3–4 percent (2013–14). - Private sector credit growth: about 30 percent (y/y) average last three years. - Credit-to-GDP ratio: over 40 percent. - Gross official reserves: US$3.6 billion in November ≈ 3½ months of prospective imports. - Foreign currency deposits: more than 1½ times gross official reserves. - Swap line: US$200 million with the Bank of International Settlements. - Reserve requirement on foreign currency deposits: 12½ percent (raised by ½ ppt in September 2012). - Additional wage bill in 2014 budget: 25 percent increase; estimated large fiscal cost ½ percent of GDP raising wage bill to 5½ percent of GDP in 2014. - RMS commitment: raise domestic revenue by ½ ppt of GDP annually. - PPP investment estimate: around 25 percent of GDP in 2012 (about $3.2 billion). - Discount rate for DSA: 5 percent (revised from 3 percent). ### Staff appraisal — summary of assessments and recommended priorities - Economic setting: activity remains strong; growth projected to pick up to 7¼ percent in 2014 and reach 7½ percent over the medium term; inflation expected to remain low in 2013–14. - Risks: external (U.S. tapering, slow European growth) and domestic (rapid credit growth, real estate exposures, extreme weather, labor instability). - Fiscal policy: continue fiscal consolidation to rebuild government deposits; make planned wage increases part of broader civil service reform; implement RMS and carefully manage contingent liabilities. - Macrofinancial policies: strengthen liquidity supervision and redefine LAR; fully enforce reserve requirements to include foreign funds; consider macroprudential measures (LTVs, LTDs) if credit growth remains rapid; build interbank and FX markets to address dollarization. - Supervision and crisis management: transition to risk-based supervision while strengthening capacity; consider moratorium on new bank licensing until capacity increases; expedite crisis management framework development and MoU on crisis resolution. - Diversification and inclusion: continue improvements in human capital, infrastructure, and business climate; reallocate spending efficiently within constrained fiscal envelope and consider national training fund over medium term after PFM reforms. *Source: IMF staff report — "Financial Sector Developments and Risks" (extract).* ### 1. Financial Sector Developments and Risks ______________________________________________________ 12 ### _cr1433 - 1. Financial Sector Developments and Risks ### Outlook and risks: growth, inflation, credit, and external position - Growth - Real GDP growth expected to stay at 7 percent in 2013. - Growth projected to pick up to 7¼ percent in 2014. - Medium-term growth projection: 7½ percent with improvements in infrastructure, competitiveness, and investment climate. - Drivers: robust exports (garments with preferential EU access), tourism, real estate, construction, and strong FDI (including factories relocating from China and Vietnam). - Recent shocks: sluggish global recovery, recent floods, slowdown in activity during the election period. - Inflation and credit - Inflation projected to stay around 3–4 percent during 2013–14. - Private sector credit growth about 30 percent (y/y) on average in the last three years. - Credit-to-GDP ratio nearly doubled to over 40 percent. - Contributing factors: entry of new banks increasing bank flows from abroad; heightened competition; falling lending rates and interest rate spreads. - External stability and reserves - Current account deficit including official transfers expected to stay flat at around 8½ percent of GDP in 2013. - Current account projected to decline to 5½ percent of GDP over the medium term. - Gross official reserves stood at US$3.6 billion in November, about 3½ months of prospective imports. - Foreign currency deposits are more than 1½ times of gross official reserves. - Real effective exchange rate broadly flat since 2008 and broadly in line with fundamentals. - Reserve adequacy estimates range from 2 to 10 months of imports depending on the cost of holding reserves. - Key immediate fiscal statistic - Fiscal deficit, excluding grants, in 2013 is expected to narrow further by about ½ percentage points (ppt) of GDP. - Stock of government deposits projected to decline slightly to around 4¾ percent (of GDP). ### Risks and spillovers - External and regional risks - Protracted economic and financial volatility in emerging markets: high likelihood; potential impact medium. - Exit from unconventional monetary policy could trigger capital outflows and increase dollar funding costs, possibly leading to a stop in foreign bank financing. - Slow growth in Europe could reduce garment exports; impact mitigated by preferential EU access. - Slower growth in China could reduce FDI and tourism to the region, affecting Cambodia indirectly. - Domestic risks - Continued rapid credit growth and proliferation of real estate financing: medium likelihood; potential impact high. - Risks: deterioration of asset quality, increased financial sector vulnerabilities and liquidity risks, decline in confidence during a downturn. - High degree of dollarization limits central bank lender-of-last-resort capacity. - Labor market instability (continued incidences of labor strikes): medium likelihood; potential impact high. - Extreme weather conditions (drought or flood): medium likelihood; potential impact medium to high—would lower agricultural production and have serious welfare implications on farmers and rural population. - Slow progress in fiscal reforms: medium likelihood; potential impact high—could hamper fiscal consolidation. - Global oil price shock (continued geopolitical events in the Middle East): low likelihood; potential impact medium—would create domestic inflationary pressure given no fuel subsidy. - Systemic vulnerabilities highlighted - Fragile confidence in banking sector following large deposit withdrawals during the election. - High dollarization and declining reserve coverage in terms of foreign currency deposits reduce effectiveness of monetary policy and lender-of-last-resort capacity. ### Policy stance, contingency measures, and authorities' views - Fiscal policy and limited policy space - Policy space to support growth is limited because fiscal consolidation has been slower than expected since 2010. - In case of adverse shocks, limited room for additional spending should be allocated to high-impact expenditures on education, health, and infrastructure. - Authorities broadly agreed with staff views on exchange rate assessment, outlook, risks, and limited policy space; authorities remained cautiously optimistic that flood impact would be less than projected and expected GDP growth to exceed 7 percent in 2013. - Monetary and financial sector contingency - High dollarization limits monetary policy effectiveness. - Declining reserve coverage in terms of foreign currency deposits highlights limitations on the National Bank of Cambodia’s (NBC) lender-of-last-resort capacity. - If financial sector risks materialize, NBC should use available lender-of-last-resort capacity and expedite implementation of the crisis management framework, including enhancing bank resolution powers. ### Policy discussions — Maintaining the momentum of fiscal consolidation - Recent fiscal context - Buoyant domestic demand and revenue collection improved the fiscal position; 2013 budget revenue targets reachable. - Increase in civil service salaries in September 2013 (the lowest salaries increased up to the minimum wage of US$80 per month) had a limited fiscal impact (0.1 percent of GDP). - Delays in donors’ reporting of foreign-funded spending hamper timely monitoring of capital expenditure. - 2014 budget and wage bill - The 2014 budget envisages an additional 25 percent increase in the wage bill, particularly for low salary bands. - The wage increase is intended to promote human resource development and improve public services under the Rectangular Strategy Phase Three (RSIII). - To finance the wage bill increase, tax and nontax revenue targets are raised (¾ ppt of GDP higher than the 2013 budget target) and other spending is kept broadly constant in terms of GDP, with planned savings to replenish government deposits. - Staff recommendations on wages and civil service reform - Large fiscal cost (½ percent of GDP) would raise Cambodia’s wage bill to 5½ percent of GDP in 2014. - Recommendation: further salary increases should be part of broader civil service reform to avoid jeopardizing fiscal consolidation and to aim to contain the wage bill to around 5 percent of GDP over the medium term by expediting reforms to improve productivity. - Authorities established two working groups for wage and civil service reforms to contain the wage bill while improving capacity and accountability. - Rebuilding fiscal buffers and revenue mobilization - Targeting an increase in government deposits is appropriate, but there is room to increase envisaged savings (Riel 80 billion) further. - Additional savings of about Riel 170 billion (less than ¼ ppt of GDP) would be required to maintain government deposits broadly constant in terms of GDP. - Suggested measures to raise additional revenue include increasing excise taxes and expanding their base, rationalizing vehicle tax, collecting more tax debt, expanding the tax net, and strengthening customs administration (including combating smuggling). - Authorities concurred there is room for additional revenue and reaffirmed commitment to rebuilding fiscal buffers. *Source: IMF staff report — "Financial Sector Developments and Risks" (extract)._ ### 9. Revenue Mobilization Strategy (RMS). The government’s commitment to continue raising ### _cr1433 - 9. Revenue Mobilization Strategy (RMS). The government’s commitment to continue raising ### Revenue Mobilization Strategy (RMS) — objectives and medium-term impact - Government commitment: raise domestic revenue by ½ ppt of GDP annually over the medium term. - Fiscal impact under unchanged overall current spending (as percent of GDP): - Fiscal deficit (excluding grants) could be reduced by about 3 ppt of GDP from 2013 to 2018. - Government deposits could be replenished to about 5½ percent of GDP by 2018. - Public external debt could be limited to less than 30 percent of GDP. - Purpose: provide resources for currently donor supported development spending (including health and education) in light of expected decline in grants. - RMS adoption timing: essential to adopt the RMS in 2014. - RMS three-pronged approach: - (i) improving revenue administration, - (ii) implementing fair and efficient tax policies, - (iii) strengthening governance. - Near-term priorities agreed with staff: - Reform excise taxes and the VAT. - Expand the base of the formal (nonestimated) tax regime. - Rationalize exemptions and tax holidays. - Immediate administrative actions planned: - Set up taxpayer services. - Modernize IT systems. - Strengthen capacity of tax officers. - Improve governance to start a virtuous cycle. - Medium-term measures: - Introduction of income tax. - Expansion of property tax base. - Better administration of nontax revenues. ### Safeguarding fiscal space — PPPs and contingent liabilities - Contingent liabilities from PPPs require careful management to contain fiscal risks. - Latest estimate: size of investment projects around 25 percent of GDP in 2012 (lower than previously estimated). - Estimation of related contingent liabilities: work still ongoing. - Institutional responses: - MEF established an investment department as a central PPP-monitoring unit. - MEF established a debt management department to manage contingent liabilities and associated risks. - Authorities’ planned actions: - Continue strengthening institutional capacity, including seeking further TA. - Adopt a ceiling on PPP guarantees. - List all contingent liabilities and guarantees in annual budget laws to improve fiscal transparency. ### Public Financial Management (PFM) — reforms and implementation priorities - Chart of accounts: adoption of a new chart of accounts with improved budget classifications in 2015 should pave the way for FMIS implementation. - FMIS: Financial Management Information Systems is being prepared; successful implementation depends on groundwork. - Immediate PFM priorities: - Expedite development of an effective internal audit mechanism for FMIS rollout. - Roll out program budgeting and relocate decision making and accountability to ten line ministries. - Strengthen donor coordination for timely reporting of donor support to improve planning and monitoring of capital spending. - Authorities’ commitments: - Requested continued TA support for PFM reforms. - Plan to fully implement program budgeting starting with the education sector to improve spending efficiency. ### Arrears - Authorities are pursuing discussions with the Russian Federation and the U.S. to resolve Cambodia’s debt arrears. - Authorities prefer to use most of the debt forgiveness toward development goals. - No agreement has been reached. ### Improving Monetary Policy Effectiveness and Containing Macro-Financial Risks — context and key vulnerabilities - Main monetary tool: reserve requirements; raised in September 2012 by ½ ppt to 12½ percent on foreign currency deposits. - Key vulnerabilities: - Bank funding from abroad not subject to prudential limits and escapes monetary control. - Large deposit withdrawals during the election (10 percent of total deposits) reduced banks’ excess reserves substantially; deposits started to return in October. - High degree of dollarization and absence of an interbank market limit NBC’s control and lender-of-last-resort capacity. - Recent financial soundness indicators do not reveal immediate concern, but risks arise from a crowded banking system, rapid credit growth, increasing foreign bank funding, greater real estate exposure, and stretched supervisory capacity. - Recommendation: continue implementing 2010 FSAP recommendations and ongoing TA; strengthen AML/CFT regime. ### Multi-pronged approach to contain macro-financial risks (policy recommendations) - Strengthen supervision of liquidity risks: - Improve monitoring of truly usable liquidity buffers (broad LAR definition overstates liquidity). - Complement supervision with contingency plans by banks and NBC, expedite planned revision of standing facilities, and improve liquidity forecasting. - Strengthen macroprudential measures: - Fully enforce reserve requirements to include bank funding from abroad in the reserve base. - Monitor maturity mismatches closely for roll-over risks. - If required reserve expansion insufficient, consider introducing LTD ratio limits and higher risk provisioning for new loans, especially in high risk sectors. - Monitor real estate sector: - Strengthen reporting requirements for all construction activity and real estate sales. - If price/activity trends intensify, NBC could introduce LTV limits in fast growing segments. - Strengthen regulation of shadow banking activities by real estate developers, including licensing and reporting of funding sources. ### Financial sector developments and specific risks (Box 1 summary) - Financial deepening: credit-to-GDP ratio nearly doubled in last three years, surpassing peers and diverging from sustainable past trends. - Market dynamics: - Intensifying competition increased banks’ risk appetite, especially among smaller and mid-sized banks. - Financial access limited to about 12 percent of the population — concentration risks. - Foreign banks entering since 2011 contributed to more than one-third of total new lending in 2012, often funded from abroad (tripled in 2012), and such funding is not subject to reserve requirements. - Liquidity and funding metrics: - Excess reserves declined from peak of 30 percent (mid-2010) to around 10 percent in recent months. - Loan-to-deposit (LTD) ratio trended upwards to over 100 percent. - Real estate and construction: - Land prices have increased by over 10 percent (yoy). - Loans to construction and real estate grew by over 44 percent (yoy) in September. - Construction approvals for residential units quadrupled in 2012. - Loan-to-value (LTV) ratios drifting upward from 60–70. - Shadow banking: proliferation of real estate financing by developers with obscure funding sources beyond regulatory oversight. - Mitigation measure: swap agreement with the Bank of International Settlements provides US$200 million to respond to liquidity shocks. ### Interbank and foreign exchange markets development - NBC introduced negotiable certificates of deposit (NCDs) in USD and KHR to develop interbank market and lay groundwork for market-based monetary operations; maturities range from 2 weeks to one year with interest rates equal to those on NBC’s deposit facilities. - Early uptake limited due to deposit withdrawals and reportedly unattractive pricing; consultations needed to improve attractiveness, including differentiating pricing from NBC’s deposit facility. - Policy suggestions: - Encourage state-owned enterprises to source foreign currency from commercial banks instead of NBC to catalyze market development. - NBC to conduct a dollarization survey to inform policies promoting local currency usage. - Authorities’ view: NCDs will take time to be widely adopted; exchange rate stability remains important for domestic currency demand; establishment of interbank and foreign exchange markets seen as prerequisite to address dollarization in medium term. ### Risk-based supervision and supervisory capacity - On-site supervision increasingly relies on risk-based targeted inspections; by October 2013, NBC completed on-site inspection of 13 banks: five rated “satisfactory”, eight “fair”. - Supervisory priorities: - Focus on emerging risks and strengthen internal training given limited resources. - Monitor LTV ratios, underwriting and valuation standards for real estate and construction loans. - Monitor concentration, related party, credit risks, and emergence of nonresident loans and deposits (including AML/CFT implications). - Improve off-site supervision by enhancing analytical skills and data quality. - Supervisory capacity challenges: - Rapid banking expansion (including three new bank licenses in 2012) strains capacity. - 2010 FSAP recommendation: impose moratorium on new bank licensing remains appropriate. - Authorities prefer continued tight stance on new licensing and encouragement of mergers rather than a formal moratorium. ### Crisis prevention and management - Institutional steps: - February: NBC, MEF, and SECC signed an MoU establishing a policy-level Working Group (WG) and a technical Core Team (CT). - Recommended two-track, time-bound approach: - CT to explore joint vulnerability exercises and information sharing needs. - WG to clarify responsibilities of agencies in preventing and resolving crises and to develop contingency plans. - Additional recommendations: - Expedite improvements to the Prompt Corrective Action framework in line with FSAP recommendations. - Sign a second MoU on crisis resolution. - Authorities’ actions: agreed on urgent need, plan to discuss a draft memorandum on crisis management with TA support from the World Bank. ### Promoting competitiveness and inclusive growth — context and priorities - Progress: substantial decline in poverty from about 50 percent in 2007 to around 21 percent in 2011; good progress toward Millennium Development Goals. - Remaining challenges: - Large segment near poverty line; growth relies on narrow economic base contributing to vulnerability. - Constraints: low education levels, skill shortages, infrastructure bottlenecks, weaknesses in business climate. - Opportunities: - Open trade and investment regime and proximity to ASEAN imply high potential for trade and inward investment. - Early signs of manufacturing diversification in recent FDI trends; likely reinforcement with Asian Economic Community implementation in 2015 and increased electricity supply. - Authorities’ priorities in RS III: promoting competitiveness, improving human capital, reducing poverty and inequality to sustain inclusive growth. *Source: IMF staff report content from the supplied PDF extract.* ### 20. Promoting competitiveness. Cambodia’s competitiveness has improved over time, but it ### 20. Promoting competitiveness. Cambodia’s competitiveness has improved over time, but it ### Competitiveness and diversification - Cambodia’s competitiveness has improved over time but remains concentrated around low value-added garment and agricultural products due to relatively low wages and productivity. - Continued improvements in: - human capital (education and training), - infrastructure, and - the business climate are needed to accelerate diversification and improve competitiveness. - Ministry of Commerce reform agenda to: - reduce the regulatory burden for businesses, and - improve governance and accountability of government agencies (including by strengthening the anti-corruption and AML frameworks) would ease constraints on doing business. - Increasing agricultural productivity and further improving rural infrastructure will help increase competitiveness in agriculture. ### Improving human capital - Cambodia has made substantial progress in education access, but there is room to improve education outcomes to move up the value-added chain and make growth more inclusive. - The increase in education spending in the 2014 budget, partly reflecting higher teacher salaries, will help contribute to human capital development. - Cambodia’s public spending on education is low relative to peers; the room to increase spending by relying solely on budgetary resources is limited. - Near-term priority: - improve efficiency and reallocate spending within the budget envelope. - Medium-term consideration: - establishing a national training fund, contingent on successful implementation of public finance reforms, particularly by improving tax administration and spending efficiency. ### Data and statistics - Improving the quality and timeliness of economic and financial data would facilitate better macroeconomic policymaking and private sector decisions. - In view of increasing foreign funding of the private sector, including through the banking system, the authorities should start collecting data on private sector debt to monitor and address associated risks. ### Box 2 — Cambodia’s Export Competitiveness and the Implications of AEC 2015 - Exports contributed on average more than 50 percent to Cambodia’s GDP growth over the past decade and are expected to remain the key driver of growth. - The United States and the European Union (EU) are the primary destinations for Cambodia’s main export item, garments. - Exports to ASEAN accounted for 12 percent of the country’s total exports at end-2012. - Rubber and woods are the main export products to ASEAN, and represent ½ and about 3 percent of the region’s total imports of these commodities, respectively. - Cambodia’s export structure and revealed comparative advantage: - Cambodia’s exports are the second least diversified in ASEAN, only after Brunei. - Strong comparative advantage in ready-to-wear garments, wood, and footwear, mainly due to relatively low wages. - These products constitute only a small share of ASEAN’s imports, limiting benefits from market expansion. - Recent increases in market share in vegetables and rubbers point to better prospects in regional markets. - Product space analysis indicates garments and vegetables do not have close connectivity with other higher income-potential products, challenging expansion into new clusters. - AEC 2015 as potential catalyst: - Cambodia’s central location within ASEAN could attract FDI in more diversified manufacturing to gain tariff-free access to regional markets and Everything but Arms initiative of the EU, while leveraging low wage advantage. - Ongoing diversification of regional supply chains could increase FDI in non-garment sectors; early signs include rapid growth of FDI in nongarment sectors. - Constraints to realize AEC benefits: - infrastructure bottlenecks (transportation, power supply), - labor skill gaps, and - business climate impediments. - Free movement of skilled labor may help short-term skill gaps but risks losing scarce skilled labor to more attractive regional markets, underscoring the need for continuous improvements in human capital through education and training. ### Box 3 — Cambodia: Fiscal Policies for Human Capital Development - Progress in education: - Increasing school enrollment and literacy rates and declining pupil teacher ratios in the last decade. - Skill shortages and mismatches continue to hamper industrial upgrading, private investment, and economic diversification. - Public spending on education: - Broadly constant at about 2½ of GDP for the past five years, lower than in peers. - Fiscal challenge: - Raising labor productivity and providing adequate resources for education within a limited fiscal space. - Over the medium term the challenge is to balance rebuilding fiscal buffers, providing room for more spending on education, and maintaining adequate capital spending as grants decline. - Near-term priorities: - reallocate resources within the budget envelope, - improve spending efficiency, and - secure more donor support for education. - Efficiency measures and programmatic reforms: - targeted programs to reduce dropout rates, - strengthen program budgeting for education, - provide schools with greater autonomy to manage spending while holding them accountable for outcomes. - Evidence on efficiency: - Cambodia’s spending efficiency for primary school enrollment is broadly comparable to peers; scores for secondary school enrollment are lower, suggesting scope to improve efficiency in secondary education. - Medium-term initiative: - establishing a national training fund (NTF) could provide additional resources for training and skill development. - NTFs are often financed by enterprises (e.g., payroll-based earmarked taxes) and may include incentives such as cost reimbursement, grants, and tax exemptions or rebates for firms that provide training. - NTF requires sufficient administrative capacity and sound tax administration. - NTF is not a substitute for formal education and should not crowd out resources allocated to formal education or generate disincentives to formal education. - Role of public finance reform: - enhance revenue administration to provide more fiscal space, - reallocate spending within the budget envelope to human capital development, - improve spending efficiency and effectiveness, and - prepare capacity to establish a training fund over the medium term. ### Staff appraisal — Economic setting - Economic activity remains strong driven by robust exports, tourism, and construction despite recent floods and some slowdown during the election. - Growth projections: - pick up to 7¼ percent in 2014, - reach 7½ percent over the medium term along with global recovery, improvements in infrastructure, competitiveness, and investment climate. - Inflation is expected to remain low in 2013–14 due to stable food and fuel prices. - The external position is stable notwithstanding a declining reserve coverage of foreign currency deposits, and the real effective exchange rate appears to be in line with fundamentals. ### Staff appraisal — Risks and policy response - External risks: - U.S. tapering and slow European growth could expose Cambodia’s favorable outlook to downside risks. - Domestic risks: - rapid credit growth and emerging risks in a fast changing financial landscape, - extreme weather conditions affecting agriculture and growth, - labor market instability disrupting garment production and exports. - Policy implication: - Should downside risks materialize, low fiscal buffers would require any additional expenditure to be allocated to high-impact development spending. ### Staff appraisal — Past recommendations and fiscal policy - Progress made: - improved revenue collection, - formulated a revenue mobilization strategy, - strengthened public financial management, including improving monitoring of contingent liabilities, - introduced NCDs to help develop the interbank market, - improved financial supervisory capacity, - established an initial MoU to establish a financial crisis management framework. - Fiscal policy recommendations: - continue fiscal consolidation to rebuild government deposits―the only fiscal buffers―in view of expected decline in grants, - make planned wage increases in 2014 part of a broader civil service reform, - successfully implement the revenue mobilization strategy and carefully manage contingent liabilities to rebuild and safeguard fiscal space, - continue public financial management reforms to improve fiscal accountability and transparency. ### Staff appraisal — Macrofinancial policies and supervision - Macrofinancial risks: - rapid credit growth, increasing foreign bank financing, buoyant real estate and construction sectors, and high dollarization limiting monetary policy effectiveness and lender-of-last-resort capacity. - Recommended measures: - strengthen liquidity supervision and redefine the LAR to better capture banks’ true liquidity conditions, - fully enforce reserve requirements to include foreign funds in the reserve base to help contain credit growth, - consider macroprudential measures such as LTVs and LTDs if credit growth remains rapid, - better monitor real estate developments by collecting more data including on developer financing, - build on NCD introduction toward market-based monetary operations and establish interbank and foreign exchange markets to begin addressing dollarization by allowing more exchange rate flexibility. - Financial supervision: - transition to risk-based supervision and rapid banking expansion strain supervisory capacity; the 2010 FSAP recommendation of imposing a moratorium on new bank licenses remains appropriate. - focus on key emerging risks given limited resources. - strengthen the financial crisis management framework; use the initial MoU between supervisory agencies to enhance cooperation and expedite preparation of a second MoU on crisis resolution. ### Staff appraisal — Diversification, inclusive growth, and arrears - Social and inclusion progress: - good progress on the Millennium Development Goals and substantial poverty reduction. - Policy priorities for inclusive and sustainable growth: - continued improvements in human capital (education and training), - infrastructure, and - business climate. - Budgetary constraints imply near-term priority on improving efficiency and reallocating spending within the budget envelope. - Medium-term consideration of a national training fund following successful PFM reforms. - Arrears: - Good faith efforts to resolve external arrears are welcome and should continue. *IMF Staff Report content.* ### 31. It is recommended that the next Article IV consultation take place on the standard 12-month ### _cr1433 - 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, prices, and medium-term projections - GDP in constant prices: 6.1 (2010), 7.1 (2011), 7.3 (2012), 7.0 (2013), 7.2 (2014 est.); projections: 7.3 (2015), 7.3 (2016), 7.5 (2017), 7.5 (2018). - (Excluding agriculture) growth: 6.9 (2010), 8.6 (2011), 8.4 (2012), 8.6 (2013), 8.3 (2014 est.). - Real agricultural output: 4.0 (2010), 3.1 (2011), 4.3 (2012), 2.4 (2013), 4.0 (2014 est.). - GDP deflator: 3.0 (2010), 3.4 (2011), 1.3 (2012), 3.1 (2013), 3.1 (2014 est.); projections: 3.1 (2015), 3.1 (2016), 3.0 (2017), 2.9 (2018). - Consumer prices (end-year): 3.1 (2010), 4.9 (2011), 2.5 (2012), 4.1 (2013), 3.0 (2014 est.); projections: 3.0 (2015), 3.0 (2016), 3.0 (2017), 3.0 (2018). - Inflation (annual average): 4.0 (2010), 5.5 (2011), 2.9 (2012), 2.9 (2013), 3.4 (2014 est.). ### Saving and investment balances (percent of GDP) - Gross national saving: 13.4 (2010), 13.9 (2011), 14.8 (2012), 14.9 (2013), 13.1 (2014 est.); projections: 14.6 (2015), 15.4 (2016), 15.9 (2017), 16.7 (2018). - Government saving: 0.5 (2010), 1.0 (2011), 1.7 (2012), 2.2 (2013), 2.2 (2014 est.); projections: 2.6 (2015), 3.1 (2016), 3.6 (2017), 4.1 (2018). - Private saving: 12.9 (2010), 12.9 (2011), 13.1 (2012), 12.7 (2013), 10.9 (2014 est.). - Gross fixed investment: 17.3 (2010), 22.0 (2011), 23.5 (2012), 23.5 (2013), 21.5 (2014 est.); projections: 22.0 (2015–2018 range reported as 22.0–22.0). - Government investment: 9.6 (2010), 8.7 (2011), 9.0 (2012), 8.8 (2013), 8.1 (2014 est.); projections: 7.8 (2015), 7.4 (2016), 7.5 (2017), 7.4 (2018). - Private investment (including FDI-related public-private power sector projects from 2011): 7.7 (2010), 13.3 (2011), 14.5 (2012), 14.7 (2013), 13.4 (2014 est.); projections: 14.2 (2015), 14.6 (2016), 14.5 (2017), 14.8 (2018). ### Money and credit - Broad money (12-month percent change): 20.0 (2010), 21.4 (2011), 20.9 (2012), 17.7 (2013), 23.7 (2014 est.). - Net credit to the government (contribution to broad money growth): 0.8 (2010), 0.0 (2011), -1.5 (2012), -3.6 (2013), -2.6 (2014 est.). - Private sector credit (annual percent change): 23.4 (2010), 31.2 (2011), 28.0 (2012), 28.0 (2013), 24.0 (2014 est.). - Velocity of money (ratio of nominal GDP to average stock of broad money): 2.6 (2010), 2.4 (2011), 2.2 (2012), 2.1 (2013), 2.1 (2014 est.). ### Public finance (percent of GDP) - Revenue: 17.0 (2010), 15.6 (2011), 16.9 (2012), 17.1 (2013), 17.4 (2014 est.); projections: 18.0 (2015), 18.2 (2016), 18.6 (2017), 18.9 (2018). - Domestic revenue: 12.1 (2010), 12.3 (2011), 14.1 (2012), 13.9 (2013), 14.5 (2014 est.). - Of which: Tax revenue: 10.1 (2010), 10.1 (2011), 11.3 (2012), 11.7 (2013), 12.2 (2014 est.). - Grants: 4.9 (2010), 3.2 (2011), 2.8 (2012), 3.2 (2013), 2.9 (2014 est.). - Total expenditure: 19.9 (2010), 19.6 (2011), 20.7 (2012), 20.1 (2013), 20.2 (2014 est.). - Expense: 10.8 (2010), 11.3 (2011), 12.0 (2012), 11.6 (2013), 12.4 (2014 est.). - Net acquisition of nonfinancial assets: 9.1 (2010), 8.3 (2011), 8.7 (2012), 8.5 (2013), 7.8 (2014 est.). - Net lending (+)/borrowing (-): -2.8 (2010), -4.1 (2011), -3.8 (2012), -3.0 (2013), -2.8 (2014 est.); projections: -1.7 (2015), -1.1 (2016), -0.8 (2017), -0.4 (2018). - Net incurrence of liabilities: 2.6 (2010), 4.1 (2011), 4.4 (2012), 3.4 (2013), 2.9 (2014 est.). - Of which: Domestic financing: 0.9 (2010), 0.7 (2011), -0.4 (2012), -0.4 (2013), -0.1 (2014 est.). ### Balance of payments and external sector - Exports, f.o.b. (millions of dollars): 3,884 (2010), 5,219 (2011), 6,016 (2012), 6,992 (2013), 8,002 (2014 est.); projections: 9,041 (2015), 10,141 (2016), 11,328 (2017), 12,592 (2018). - Exports (annual percent change): 29.7 (2010), 34.4 (2011), 15.3 (2012), 16.2 (2013), 14.4 (2014 est.). - Imports, f.o.b. (millions of dollars): -5,466 (2010), -7,260 (2011), -8,426 (2012), -9,789 (2013), -11,135 (2014 est.); projections: -12,269 (2015), -13,466 (2016), -14,843 (2017), -16,335 (2018). - Imports (annual percent change): 21.7 (2010), 32.8 (2011), 16.1 (2012), 16.2 (2013), 13.7 (2014 est.). - Current account (including official transfers, millions of dollars): -441 (2010), -1,040 (2011), -1,233 (2012), -1,339 (2013), -1,430 (2014 est.); projections: -1,373 (2015), -1,340 (2016), -1,340 (2017), -1,338 (2018). - Current account (percent of GDP): -3.9 (2010), -8.1 (2011), -8.7 (2012), -8.6 (2013), -8.4 (2014 est.); projections: -7.4 (2015), -6.6 (2016), -6.1 (2017), -5.5 (2018). - Trade balance (millions of dollars): -1,582 (2010), -2,040 (2011), -2,410 (2012), -2,797 (2013), -3,132 (2014 est.). - Services and income (net): 168 (2010), 194 (2011), 417 (2012), 672 (2013), 889 (2014 est.). - Private transfers (net): 212 (2010), 313 (2011), 328 (2012), 351 (2013), 339 (2014 est.). - Official transfers (net): 762 (2010), 493 (2011), 475 (2012), 475 (2013), 475 (2014 est.). - Capital and financial account (millions of dollars): 584 (2010), 1,345 (2011), 1,606 (2012), 1,683 (2013), 1,917 (2014 est.); projections: 1,854 (2015), 1,890 (2016), 2,016 (2017), 2,038 (2018). - Foreign direct investment (FDI, millions of dollars): 762 (2010), 1,484 (2011), 1,598 (2012), 1,611 (2013), 1,459 (2014 est.); projections: 1,500 (2015), 1,598 (2016), 1,737 (2017), 1,795 (2018). - Overall balance (millions of dollars): 143 (2010), 305 (2011), 373 (2012), 345 (2013), 487 (2014 est.); projections: 481 (2015), 550 (2016), 676 (2017), 700 (2018). - Gross official reserves (millions of U.S. dollars): 2,653 (2010), 3,032 (2011), 3,463 (2012), 3,824 (2013), 4,327 (2014 est.); projections: 4,820 (2015), 5,382 (2016), 6,069 (2017), 6,781 (2018). - Gross official reserves (in months of next year's imports): 3.7 (2010), 3.6 (2011), 3.6 (2012), 3.6 (2013), 3.7 (2014 est.); projections: 3.7 (2015), 3.8 (2016), 3.9 (2017), 3.9 (2018). ### External debt and debt service - Public external debt (millions of dollars): 3,337 (2010), 3,841 (2011), 4,486 (2012), 5,052 (2013), 5,559 (2014 est.); projections: 5,949 (2015), 6,311 (2016), 6,624 (2017), 6,929 (2018). - Public external debt (percent of GDP): 28.7 (2010), 29.7 (2011), 31.6 (2012), 32.8 (2013), 33.1 (2014 est.). - Public debt service (millions of dollars): 77 (2010), 88 (2011), 89 (2012), 115 (2013), 147 (2014 est.); projections: 162 (2015), 215 (2016), 228 (2017), 213 (2018). - Public debt service (percent of exports of goods and services): 1.4 (2010), 1.2 (2011), 1.0 (2012), 1.1 (2013), 1.3 (2014 est.). ### Fiscal operations and budgets (selected 2013–14 data) - Revenue (2013 actual / 2014 budget / 2014 Jan–Aug actual / 2014 est. / 2014 proj.): 6,807 / 8,023 / 8,064 / 8,114 / 8,900 (values in millions of riels reported in Table 4 and Table 5 contexts). - Grants (2013 actual): 1,270; Grants (2014 budget): 2,325; Grants (2014 est.): 1,054. - Total expenditure (2013 actual): 8,114; Total expenditure (2014 est.): 9,363; Total expenditure (2014 proj.): 10,431. - Net lending (+)/borrowing (-) (2013 actual): -1,307; (2014 est.): -1,340; (2014 proj.): -1,531. - Priority sector spending: 3.0 (2010), 3.7 (2011), 3.8 (2012), 3.8 (2013), 4.2 (2014 est.). ### Monetary survey and banking sector (selected) - Net foreign assets (in billions of riels): 17,054 (Mar 2011), 18,426 (Jun 2011), 19,390 (Sep 2011), 20,717 (Dec 2011), 20,483 (Mar 2012), 21,265 (Jun 2012), 22,549 (Sep 2012), 21,773 (Dec 2012), 18,721 (Mar 2013), 21,854 (Dec 2013 proj.), 24,324 (Dec 2014 proj.). - National Bank of Cambodia net foreign assets (in billions of riels): 14,982 (Mar 2011), 16,010 (Jun 2011), 17,127 (Sep 2011), 17,675 (Dec 2011), 18,226 (Mar 2012), 18,583 (Jun 2012), 20,026 (Sep 2012), 19,019 (Dec 2012), 16,868 (Mar 2013), 19,721 (Dec 2013 proj.), 22,311 (Dec 2014 proj.). - Broad money (in billions of riels): 19,477 (Mar 2011), 23,640 (Jun 2011), 24,864 (Sep 2011), 26,652 (Dec 2011), 26,864 (Mar 2012), 28,592 (Jun 2012), 30,481 (Sep 2012), 31,659 (Dec 2012), 29,356 (Mar 2013), 33,641 (Dec 2013 proj.), 41,603 (Dec 2014 proj.). - Foreign currency deposits (in millions of U.S. dollars): 3,910 (Mar 2011), 4,736 (Jun 2011), 5,002 (Sep 2011), 5,546 (Dec 2011), 5,598 (Mar 2012), 5,949 (Jun 2012), 6,316 (Sep 2012), 6,570 (Dec 2012), 5,920 (Mar 2013), 6,995 (Dec 2013 proj.), 8,536 (Dec 2014 proj.). - Credit to the private sector (in millions of U.S. dollars): 3,201 (Mar 2011), 4,214 (Jun 2011), 4,518 (Sep 2011), 4,866 (Dec 2011), 5,160 (Mar 2012), 5,455 (Jun 2012), 5,789 (Sep 2012), 6,275 (Dec 2012), 6,600 (Mar 2013), 6,961 (Dec 2013 proj.), 8,409 (Dec 2014 proj.). - Foreign currency loans (in billions of riels): 12,530 (Mar 2011), 16,583 (Jun 2011), 17,869 (Sep 2011), 19,252 (Dec 2011), 20,423 (Mar 2012), 21,609 (Jun 2012), 22,959 (Sep 2012), 24,902 (Dec 2012), 26,201 (Mar 2013), 27,647 (Dec 2013 proj.), 34,282 (Dec 2014 proj.). - Loan-to-deposit ratio (foreign currency loans and deposits only, percent): 79.1 (Mar 2011), 86.7 (Jun 2011), 89.4 (Sep 2011), 86.9 (Dec 2011), 91.3 (Mar 2012), 90.9 (Jun 2012), 90.7 (Sep 2012), 94.6 (Dec 2012), 110.4 (Mar 2013), 98.6 (Dec 2013 proj.), 97.6 (Dec 2014 proj.). ### Financial soundness indicators (selected) - Regulatory capital to risk-weighted assets (percent): ranges reported across 2008–2013, e.g., 27.6, 32.3, 31.4, 31.2, 29.0, 27.5, 26.2, 29.1, 28.8, 27.2, 25.0, 25.6, 25.6. - Nonperforming loans to total gross loans (percent): 2.9 (2008), 3.9 (2009), 2.9 (2010), 2.9 (2011), 3.0 (2012), 3.0 (2013) and quarterly variations reported. - Return on equity (annualized, percent): reported across 2008–2013 with values such as 12.4, 4.9, 6.5, 9.0, 9.6, 10.5, 9.7, 11.2, 11.0, 10.5, 10.2, 12.9, 11.6. - Liquid assets to total assets (percent): values across quarters, e.g., 14.2, 19.4, 18.0, 17.9, 17.9, 19.0, 16.2, 17.2, 17.5, 16.1, 15.4, 16.2, 16.0. ### Key FSAP recommendations of high priority (Table 8) - General stability: - Improve the quality of data; strengthen supervision; collect additional credit-related information. (Short term — In process) - Ensure banks retain appropriate liquid assets by enforcing existing regulations. (Short term — In process) - Upgrade law to formalize responsibilities among supervisors and establish MOUs for information exchange (NBC, MEF, SECC) and with foreign supervisors. (Short term — Initiated but not concluded) - Upgrade number and capacity of supervisory staff; develop training programs for financial institutions and external audit profession. (Medium term — In process) - Develop and implement strategic plan to address conflicts and overlaps in financial sector legal and regulatory framework. (Medium term — In process) - Supervision and regulation — Banking: - Develop supervisory strategy for banks that cannot meet new capital requirement. (Short term — Done) - Conduct comprehensive upgrades to the legal framework. (Short term — In process) - Reprioritize staff work to facilitate forward-looking, risk-based supervision. (Short term — In process) - Impose a moratorium on new bank licenses while supervisory capacity/resources remain inadequate. (Short term — Under NBC review) - Nonbank financial sector: - Revise capital regulations with liability, investment and accounting rules for insurance market. (Short term — Done) - Enhance powers for intervention, corrective measures and enforcement. (Short term — In process) - Conduct readiness study prior to launch of the stock exchange. (Short term — Done) - Access to finance: - Enhance supervisory practices for microfinance deposit-taking institutions; impose moratorium while supervisory capacity/resources inadequate. (Medium term — In process) - Crisis management framework: - Revise PCA framework by developing additional triggers for asset quality, liquidity, and earlier intervention based on solvency ratio. (Medium term — In preparation) - Introduce regulation allowing banks to use fixed deposits at the NBC and any issue of government or government-guaranteed securities as eligible collateral for interbank and NBC repos. (Short term — Done) - Develop a crisis management framework. (Medium term — In preparation) - Transparency and governance: - Introduce due process for dismissal of NBC Board members and Governor by specifying legal grounds and appeal process. (Medium term — In preparation) - Amend law to reduce government representation on NBC Board; reflect practice of appointing two Deputy Governors. (Short term — In preparation) - Draft/implement banking regulations on internal audit and controls, risk management, and compliance functions at banks. (Short-term — Done) - AML/CFT: - Introduce measures for overall AML/CFT risk assessments and risk profiling of financial institutions. (Short-term — In preparation) ### Social and development indicators (MDG highlights) - Poverty headcount ratio at $1.25 per day (PPP, percent of population): 49 (1990), 40 (2000), 19 (2005), 20 (2010). - Population below minimum level of dietary energy consumption (percent): reported values include 33 and 21 in different years. - Net primary enrollment (percent): 67 (1990), 87 (1995), 90 (2000), 96 (2005), 98 (2009), 100 (2010). - Life expectancy at birth (years): reported values include 50 (1990) and 63 (2009–2010 entries). - GNI per capita (Atlas method, current U.S. dollars): reported values include 280, 450, 690, 740, 800, 880 across various years. - Aid per capita (current U.S. dollars): 4 (1990), 50 (1995), 31 (2000), 39 (2005), 15 (2009), 15 (2010). ### Debt Sustainability Analysis (DSA) conclusion - The DSA shows that Cambodia’s debt distress rating remains low with all debt burden indicators projected to remain below the respective thresholds. - The DSA indicates continued vulnerability of debt sustainability to growth, exports, and fiscal shocks. - Policy implications noted: continued structural reforms to diversify growth, and to mobilize fiscal revenues. *Sources: Cambodian authorities; and IMF staff estimates and projections.* ### 1. This DSA incorporates some updates compared to the 2012 DSA. The discount rate ### _cr1433 - 1. This DSA incorporates some updates compared to the 2012 DSA. The discount rate ### Updates to the DSA and key assumptions - The discount rate is revised upward to 5 percent from 3 percent, reflecting the IMF Board decision to link the discount rate to the 10-year average level of the U.S. dollar Commercial Interest Reference Rate. - Macroeconomic assumptions underlying the baseline scenario remain broadly similar to the 2012 DSA, except that Cambodia is now assumed to issue domestic debt (e.g., government bonds) over the long term. - The debt-to-GDP ratio at end-2012 was slightly higher than the previous estimate due to larger disbursement of bilateral debts. - Cambodia’s Country Policy and Institutional Assessment (CPIA) rating remained unchanged at “medium performer.” ### Public external debt stock and composition (end-2012) - External public debt including arrears: around US$4.5 billion or 32 percent of GDP (19 percent in NPV terms). - Debt-to-GDP ratio increased from 27 percent in 2008 to 32 percent in 2012. - Share of bilateral debt (including arrears) in total external public debt increased from 50 percent in 2009 to 63 percent in 2012. - China: more than 50 percent of total bilateral debt stock and about 80 percent of bilateral debt disbursement during the past three years. - Cambodia remains in arrears to the Russian Federation and the U.S.: nearly 20 percent of total debt or 6 percent of GDP; these arrears are not being serviced and negotiations status unchanged since the last DSA. - DSA assumption: no debt restructuring; arrears continue to build up over the projection period. ### Domestic public debt and debt management developments - Domestic public debt: virtually no domestic public debt at present. - Small bonds outstanding: US$4 million (issued in the early 2000s). - Old claims on the government: half percent of GDP, with no interest, carried over from the 1990s. - Debt management reforms and contingent liability monitoring: - Debt Management Strategy adopted in 2012; progress in monitoring potential contingent liabilities related to PPP power projects that receive government guarantees. - Collected contractual agreements of most projects; latest estimates: total investment of all PPP projects around $3.2 billion (about 25 percent of GDP in 2012), lower than previous estimate of about 50 percent of GDP in 2011. - Work to estimate payment obligations and size of contingent liability has commenced. - Two new departments established within the Ministry of Economy and Finance: (1) investment department to review/select and monitor PPP projects, and (2) debt management department to manage risks including contingent liabilities. - Drafting new laws/regulations on lending, nonlending, and government guarantees to adopt a ceiling on guarantees and list contingent liabilities in annual budget laws. ### Macroeconomic framework (baseline) - Growth and inflation: - GDP growth: expected at 7 percent in 2013 and projected to gradually increase to 7½ percent by 2018; over the long term projected to moderate to 7 percent. - Inflation: 3‒4 percent during 2013‒14; medium term expected to average 3 percent. - External stability: - Current account deficit including official transfers: around 8½ percent of GDP in 2013. - Fully financed by FDI and official loans. - Medium-term current account deficit projected to decline to 5½ percent of GDP. - Gross official reserves projected to remain at around 3½ months of prospective imports. - External debt disbursement projected to average about US$500 million annually during 2013‒18 (about 2½ percent of GDP on average). - Debt-to-GDP ratio projected to gradually decline to 29 percent by 2018. - Fiscal sustainability: - Domestic revenue projected to increase by ½ percent of GDP annually over the medium term. - Domestically-funded capital spending projected to increase from 1¾ percent of GDP in 2013 to 3 percent in 2018, while externally-funded capital spending projected to decline from 6½ to 4 percent of GDP; overall capital spending maintained at least at 7 percent of GDP. - Fiscal deficit excluding grants projected to decline from about 6 percent of GDP in 2013 to 2¾ percent in 2018. - Domestic debt assumption (new compared to last DSA): - Net domestic-debt issuance starting from ¼ ppt of GDP annually in 2021, gradually increasing to about ¾ ppt of GDP in 2033. - Total stock of domestic debt would reach 3½ percent of GDP by 2033 (compared with LIC average domestic debt of about 15 percent of GDP). - Authorities’ intention: no domestic bond issuance over the medium term; possible limited issuance over the long term to develop the domestic bond market. - Selected tabulated projections (as presented): - GDP growth: 2011 7.1; 2012 7.3; 2013 7.0; 2014 7.2; 2015 7.3; 2016 7.3; 2017 7.5; 2018 7.5; 2014-18 average 7.4; 2019-23 7.3; 2024-33 7.0 - Consumer prices (end-year): 2011 4.9; 2012 2.5; 2013 4.1; 2014 3.0; 2015 3.0; 2016 3.0; 2017 3.0; 2018 3.0; 2014-18 3.0; 2019-23 3.0; 2024-33 3.0 - Revenue (percent of GDP): 2011 15.6; 2012 16.9; 2013 17.1; 2014 17.4; 2015 18.0; 2016 18.2; 2017 18.6; 2018 18.9; 2014-18 18.2; 2019-23 18.9; 2024-33 19.7 - Domestic revenue (percent of GDP): 2011 12.3; 2012 14.0; 2013 13.9; 2014 14.5; 2015 15.0; 2016 15.5; 2017 16.0; 2018 16.5; 2014-18 15.5; 2019-23 17.5; 2024-33 19.1 - Grants (percent of GDP): 2011 3.2; 2012 2.8; 2013 3.2; 2014 2.9; 2015 2.9; 2016 2.7; 2017 2.6; 2018 2.4; 2014-18 2.7; 2019-23 1.4; 2024-33 0.7 - Total expenditure (percent of GDP): 2011 19.6; 2012 20.7; 2013 20.1; 2014 20.2; 2015 19.7; 2016 19.3; 2017 19.4; 2018 19.3; 2014-18 19.6; 2019-23 20.2; 2024-33 21.8 - Net lending (+)/borrowing(-): 2011 -4.1; 2012 -3.8; 2013 -3.0; 2014 -2.8; 2015 -1.7; 2016 -1.1; 2017 -0.8; 2018 -0.4; 2014-18 -1.4; 2019-23 -1.2; 2024-33 -2.1 - Net lending (+)/borrowing(-) excluding grants: 2011 -7.3; 2012 -6.6; 2013 -6.1; 2014 -5.7; 2015 -4.7; 2016 -3.9; 2017 -3.4; 2018 -2.8; 2014-18 -4.1; 2019-23 -2.6; 2024-33 -2.8 - Government deposits (percent of GDP): 2011 4.6; 2012 4.9; 2013 4.7; 2014 4.7; 2015 4.8; 2016 4.9; 2017 5.2; 2018 5.5; 2014-18 5.0; 2019-23 5.5; 2024-33 6.1 - Current account balance (including transfers, percent of GDP): 2011 -8.1; 2012 -8.7; 2013 -8.6; 2014 -8.4; 2015 -7.4; 2016 -6.6; 2017 -6.1; 2018 -5.5; 2014-18 -6.8; 2019-23 -6.0; 2024-33 -5.7 - Foreign direct investment (percent of GDP): 2011 11.5; 2012 11.3; 2013 10.4; 2014 8.6; 2015 8.1; 2016 7.9; 2017 7.9; 2018 7.4; 2014-18 8.0; 2019-23 7.1; 2024-33 7.2 - External loans (percent of GDP): 2011 4.2; 2012 4.9; 2013 3.9; 2014 3.3; 2015 2.5; 2016 2.2; 2017 2.0; 2018 1.8; 2014-18 2.4; 2019-23 2.0; 2024-33 1.7 - Gross official reserves (months of next year's imports): 2011 3.6; 2012 3.6; 2013 3.6; 2014 3.7; 2015 3.7; 2016 3.8; 2017 3.9; 2018 3.9; 2014-18 3.8; 2019-23 3.9; 2024-33 3.4 ### External and public debt sustainability results - Baseline external DSA finding: Cambodia’s risk of debt distress is low. - PV of debt-to-GDP, debt-to-exports, and debt-to-revenue ratios are below respective thresholds and projected to decline over the 20-year projection period. - Debt service-to-exports and debt service-to-revenue ratios expected to decline and remain well below thresholds throughout projection period. - Standard stress tests do not indicate major vulnerabilities, though debt-to-revenue appears vulnerable to exchange rate and export shocks. - Public sector DSA: - Closely tracks external DSA because public domestic debt is small. - PV of public debt-to-GDP and public debt service-to-revenue ratios decline gradually; debt service-to-revenue remains low in most scenarios. - Unlike last year’s DSA with virtually zero domestic debt, current DSA assumes domestic debt will increase after 2020 and reach about 3½ percent of GDP over the long run. - Vulnerabilities: - Lack of fiscal consolidation: if the primary balance remains unchanged at the 2013 level, PV of public debt-to-GDP would continue to increase, reaching about 24 percent in the long run. - Permanent growth shock: if real GDP growth is one standard deviation lower than baseline, public debt-to-GDP and debt-to-revenue ratios would continue to increase. ### Contingent liabilities and downside risks - Potential contingent liabilities from PPP power generation and distribution projects: - Total investment of PPP projects estimated around $3.2 billion (about 25 percent of GDP in 2012). - If one in ten projects fails, an average of 2½ percent of GDP (one tenth of total investment estimate) could be added to the debt stock. - Network externalities could trigger additional failures and further erode debt sustainability. - Ongoing work (with World Bank technical assistance) to estimate payment obligations and size of contingent liabilities; value-at-risk approach being considered. - Other contingent liabilities: - Fiscal cost to support the financial sector during a banking crisis: median direct fiscal cost of banking crisis in emerging market economies estimated at 11.5 percent of GDP. ### Authorities’ views and commitment - Authorities broadly agreed with DSA results and macroeconomic assumptions (medium- and long-term growth around 7 percent on average). - Authorities noted actual debt disbursement could exceed US$500 million a year considering prospective new loans, but reiterated commitment to maintain debt-to-GDP ratio below 30 percent over the medium term. - Authorities confirmed no plan for domestic bond issuance until 2018 but agreed some domestic debt could be considered over the long term to develop the domestic bond market. ### Conclusions and policy implications - Conclusion: Cambodia remains at low risk of debt distress under the baseline scenario. - Key policy implications and priorities: - Preserve macroeconomic stability. - Diversify the economy and exports. - Implement revenue mobilization strategy and continue fiscal consolidation to reduce vulnerability to shocks. - Strengthen monitoring and management of contingent liabilities, especially PPP-related power projects, and continue developing legal/regulatory frameworks and institutional capacity for debt and PPP oversight. *Prepared by International Monetary Fund and International Development Association; January 9, 2014.* ### 13. Staff welcomes progress made in strengthening debt management. Prudent debt ### _cr1433 - 13. Staff welcomes progress made in strengthening debt management. Prudent debt ### Progress on debt management and contingent liabilities - Staff welcomes authorities’ progress in collecting more information on infrastructure projects developed under PPPs and related government guarantees. - Staff looks forward to results of the exercise recently initiated to estimate the size of contingent liabilities. - Staff encourages authorities to enhance fiscal transparency by: - adopting a ceiling on PPP guarantees, and - listing all contingent liabilities and government guarantees in annual budget laws. ### Policy recommendations (fiscal and debt management) - Strengthen monitoring and management of potential contingent liabilities to safeguard fiscal space. - Adopt a ceiling on PPP guarantees to limit exposure from off-budget commitments. - Require listing of all contingent liabilities and government guarantees in annual budget laws to improve fiscal transparency. - Continue fiscal consolidation to rebuild government deposits (noted as the only fiscal buffers), including making planned wage increases in 2014 part of broader civil service reform. - Implement and continue public financial management (PFM) reforms to improve fiscal accountability and transparency. - Carefully manage contingent liabilities as part of debt sustainability efforts. ### Debt sustainability findings and indicators (selected figures from Tables and Text) - Public and publicly guaranteed external debt (PV of PPG external debt in percent of GDP and related indicators, selected years shown in tables and figures): - PV of PPG external debt (percent of GDP): 19.0 (2013), 19.7 (2014), 19.7 (2015), 19.3 (2016), 18.5 (2017), 17.7 (2018), 17.0 (2023), 14.9 (2033), 11.7 (2033 memorandum entries). - PV of PPG external debt (in percent of exports): 30.8 (2013), 30.4 (2014), 29.2 (2015), 27.9 (2016), 26.4 (2017), 24.9 (2018), 23.8 (2023), 19.9 (2033), 13.2 (2033 memorandum entries). - PV of PPG external debt (in percent of government revenues): 125.4 (2013), 135.9 (2014), 130.9 (2015), 123.5 (2016), 115.3 (2017), 106.7 (2018), 99.7 (2023), 80.3 (2033), 57.0 (2033 memorandum entries). - Debt service and financing indicators: - Debt service-to-exports ratio (in percent): 1.4 (2010), 1.2 (2011), 1.0 (2012), 1.1 (2013), 1.3 (2014), 1.3 (2015), 1.5 (2016), 1.5 (2017), 1.2 (2018), 1.1 (2023), 0.8 (2033). - PPG debt service-to-revenue ratio (in percent): 5.2 (2010), 5.2 (2011), 4.2 (2012), 5.1 (2013), 5.7 (2014), 5.6 (2015), 6.6 (2016), 6.2 (2017), 5.2 (2018), 4.4 (2023), 3.5 (2033). - Total gross financing need (billions of U.S. dollars): -0.3 (2010), -0.4 (2011), -0.3 (2012), -0.2 (2013), 0.0 (2014), 0.0 (2015), -0.2 (2016), -0.2 (2017), -0.3 (2018), -0.1 (2023), -1.4 (2033). - Noninterest current account deficit that stabilizes debt ratio: 3.3 (2010), 6.7 (2011), 6.6 (2012), 7.0 (2013), 7.7 (2014), 7.7 (2015), 7.0 (2016), 7.0 (2017), 6.6 (2018), 6.5 (2023), 5.3 (2033). ### Stress tests and sensitivity analyses (selected results) - Most extreme stress tests identified for various ratios: - In Figure 1 notes: "The most extreme stress test is the test that yields the highest ratio in 2023. In figure b. it corresponds to a one-time depreciation shock; in c. to an exports shock; in d. to a one-time depreciation shock; in e. to an exports shock and in figure f. to an exports shock." - In Figure 2 notes: "The most extreme stress test is the test that yields the highest ratio in all figures, this corresponds to a permanent growth shock in 2023." - Sensitivity Table highlights for PV of debt-to-GDP ratio (selected rows show percent values under scenarios): - Baseline and alternative scenarios (PV of debt-to-GDP ratio rows): Baseline: 20 (2013), 20 (2014), 19 (2015), 19 (2016), 18 (2017), 17 (2018), 15 (2023), 12 (2033). - A2 (New public sector loans on less favorable terms in 2013): 20, 20, 21, 20, 20, 20, 20, 19, 18 (years spanning 2013–2033 in table). - Bound test B6 (One-time 30 percent nominal depreciation relative to the baseline in 2014): values include 20 (2013), 28 (2014), 27 (2015), 26 (2016), 25 (2017), 24 (2018), 21 (2023), 17 (2033) for PV of debt-to-exports ratio panel. - PV of debt-to-exports ratio exhibits high sensitivity to export shocks: - Baseline and stress values reported include e.g., baseline 30 (2013), 29 (2014), 28 (2015), 26 (2016), 25 (2017), 24 (2018), 20 (2023), 13 (2033); under export value growth shock B2 values can rise to 40, 57, 54, 51, 48, 38, 20 in corresponding years (as tabulated). ### Public sector debt outlook (selected figures from Table 2a and Table 2b) - Public sector debt (general government gross debt, percent of GDP): - 29.3 (2010), 30.3 (2011), 32.1 (2012), 33.3 (2013), 33.5 (2014), 32.7 (2015), 31.8 (2016), 30.4 (2017), 29.1 (2018), 25.9 (2023), 22.5 (2033). - Foreign-currency denominated share of public sector debt (percent of GDP): - 28.7 (2010), 29.7 (2011), 31.6 (2012), 32.8 (2013), 33.1 (2014), 32.3 (2015), 31.4 (2016), 30.1 (2017), 28.8 (2018), 25.0 (2023), 19.0 (2033). - Change in public sector debt (percent of GDP): 0.2 (2010), 1.0 (2011), 1.8 (2012), 1.2 (2013), 0.2 (2014), -0.7 (2015), -1.0 (2016), -1.3 (2017), -1.4 (2018), -0.4 (2023), -0.1 (2033). - Identified debt-creating flows (percent of GDP) and components (selected): - Primary deficit: 2.3 (2010), 4.0 (2011), 3.2 (2012), 1.9 (2013), 1.9 (2014), 2.7 (2015), 2.1 (2016), 1.2 (2017), 0.5 (2018), 0.3 (2023), 0.1 (2033). - Revenue and grants: 18.0 (2010), 16.3 (2011), 17.9 (2012), 17.7 (2013), 18.0 (2014), 18.5 (2015), 18.8 (2016), 19.2 (2017), 19.5 (2018), 19.5 (2023), 21.1 (2033). - Primary (noninterest) expenditure: 20.3 (2010), 20.3 (2011), 21.2 (2012), 20.3 (2013), 20.0 (2014), 19.7 (2015), 19.2 (2016), 19.5 (2017), 19.6 (2018), 21.0 (2023), 23.3 (2033). - Automatic debt dynamics contribution (percent of GDP): -2.9 (2010), -2.6 (2011), -2.4 (2012), -2.1 (2013), -2.3 (2014), -2.4 (2015), -2.2 (2016), -2.4 (2017), -2.4 (2018), -1.9 (2023), -1.6 (2033). - Gross financing need (percent of GDP): 3.5 (2010), 5.2 (2011), 4.4 (2012), 3.8 (2013), 3.3 (2014), 2.4 (2015), 1.9 (2016), 1.6 (2017), 1.2 (2018), 2.5 (2023), 3.0 (2033). - PV of public sector debt-to-revenue ratio (in percent): 108.9 (earlier projection years), 114.1, 112.2, 106.0, 100.5, 93.9, 88.8, 81.3, 72.2 (projection sequence in table). ### Key macroeconomic assumptions used in projections (selected exact values) - Real GDP growth (in percent): 6.1 (2010), 7.1 (2011), 7.3 (2012), 8.0 (2013 in some tables), 3.6 (2014 in some series), staff central assumptions include 7.0, 7.2, 7.3, 7.3, 7.5, 7.5, 7.3, 7.1, 7.0, 7.1 in projection runs (as reported across tables). - GDP deflator in U.S. dollar terms (change in percent): 1.9 (2010), 7.0 (2011), 2.1 (2012), 4.4 (2013), 3.7 (2014), 2.8 (2015), 1.6 (2016), 1.8 (2017), 1.8 (2018), 1.7 (2023), 1.8 (2033) — values reported in various projection panels. - Effective interest rate (percent): 1.1 (2010), 1.2 (2011), 1.1 (2012), 1.1 (2013), 0.1 (2014), 1.3 (2015), 1.6 (2016), 1.4 (2017), 1.9 (2018), 1.3 (2023), 0.9 (2033) — table entries indicate year-by-year assumptions. - Growth of exports of G&S (U.S. dollar terms, in percent): 22.8 (2010), 33.8 (2011), 17.3 (2012), 14.7 (2013), 14.3 (2014), 15.4 (2015), 13.6 (2016), 11.7 (2017), 10.9 (2018), 10.8 (2023), 10.3 (2033) — as presented in projection tables. - Growth of imports of G&S (U.S. dollar terms, in percent): 19.2 (2010), 33.3 (2011), 16.2 (2012), 14.5 (2013), 12.5 (2014), 14.9 (2015), 12.5 (2016), 9.7 (2017), 9.8 (2018), 10.2 (2023), 10.0 (2033). - Government revenues (excluding grants, in percent of GDP): 13.1 (2010), 13.1 (2011), 15.2 (2012), 14.5 (2013), 15.1 (2014), 15.6 (2015), 16.1 (2016), 16.6 (2017), 17.1 (2018), 18.6 (2023), 20.6 (2033). - Aid flows (in billions of U.S. dollars): 0.8 (2010), 0.7 (2011), 0.7 (2012), 0.9 (2013), 0.8 (2014), 0.8 (2015), 0.8 (2016), 0.9 (2017), 0.9 (2018), 0.8 (2023), 1.1 (2033). - Of which: Grants (billions): 0.6 (2010), 0.4 (2011), 0.4 (2012), 0.5 (2013), 0.5 (2014), 0.5 (2015), 0.5 (2016), 0.6 (2017), 0.6 (2018), 0.4 (2023), 0.4 (2033). - Of which: Concessional loans (billions): 0.2 (2010), 0.3 (2011), 0.3 (2012), 0.4 (2013), 0.3 (2014), 0.3 (2015), 0.3 (2016), 0.3 (2017), 0.3 (2018), 0.4 (2023), 0.7 (2033). ### Additional context from Article IV and institutional collaboration (selected findings) - Staff notes progress by authorities in improving revenue collection, formulating a revenue mobilization strategy (RMS), and strengthening PFM including monitoring of contingent liabilities. - Executive Board assessment highlighted: - Growth projected to pick up to 7¼ percent in 2014 and reach 7½ percent over the medium term, conditional on global recovery and improvements in infrastructure and competitiveness. - Downside risks include U.S. tapering, slow European growth, rapid credit growth, real estate sector risks, extreme weather, and labor market instability affecting garment production. - Rapid credit growth: private sector credit grew about 30 percent year-on-year on average in the last three years; loan-to-deposit (LTD) ratio trended upwards to over 100 percent and credit-to-GDP ratio nearly doubled to 40 percent. - Recommendation to enforce reserve requirements (including on foreign funds), consider macroprudential measures (e.g., LTVs and LTDs) if needed, and continue developing NCDs and interbank markets to address dollarization. - IMF-World Bank collaboration: joint work on debt sustainability analysis and coordination on public financial management, FSAP follow-up, and contingent liabilities technical assistance. *Source: IMF staff report excerpts and data tables as presented in the provided content.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1433.pdf_