Public Information Notice: IMF Concludes Article IV Consultation with Cambodia

October 13, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On September 15, 2000, the Executive Board concluded the Article IV consultation with Cambodia.1


The government embarked on a reform program in early 1999 to revive the momentum and policy measures which had been interrupted in 1997 and 1998 due to the regional financial crisis and internal political turmoil. Under the new government, cooperation between the coalition partners has facilitated the implementation of reforms, and strong actions have been taken in key areas such as fiscal reform, bank restructuring, forestry policy, and military demobilization.

In support of the government's reform program, a three-year PRGF arrangement for SDR 58.5 million (67 percent of quota) was approved by the Executive Board of the Fund on October 22, 1999, and a World Bank SAC of SDR 21.7 million was approved on February 29, 2000. At the May 2000 Consultative Group meeting in Paris, donors were cautiously optimistic in view of the progress that had been made in the past year while noting that Cambodia still had a long way to go. The authorities have reaffirmed their commitment to improve governance in key areas to provide the basis for sustainable economic growth and for reducing poverty over the medium term.

Policy implementation in 1999 was consistent with the macroeconomic objectives of the PRGF-supported program. Real GDP growth is estimated to have risen to 5 percent, with strong growth in garment production, tourism, non-forestry agriculture, and construction. Inflation fell to an annual average of 4 percent compared to the program target of 5 percent, reflecting falling food prices. While the external current account deficit widened to 11½ percent of GDP (4 percent of GDP including grants) reflecting a recovery in imports and higher petroleum prices, gross official reserves still increased, as expected, to US$422 million, equivalent to 3 1/3 months of imports of goods and services.

Budgetary performance strengthened considerably in 1999. Revenue increased by 2½ percentage points to 11½ percent of GDP reflecting a structural improvement in tax collection, and some exceptional increases in nontax revenue related to the administration of garment quotas received from the United States. Improvements were also made in budgetary implementation. Current expenditure was kept within budgeted levels, and, for the first time in several years, spending for defense and security was close to budgetary appropriations, while social sector spending on a commitment basis slightly exceeded budgetary provisions. The current budget surplus increased to 1.8 percent of GDP, while the overall deficit declined to 4½ percent of GDP (1½ percent of GDP including grants). With substantial external financing (4½ percent of GDP), the government was able to significantly reduce its debt to the central bank that had increased substantially during 1997-98.

Monetary and exchange rate policies in 1999 were also supportive of improved economic conditions. The 17 percent increase in broad money was fully reflected in an increase in net foreign assets. Net domestic assets declined, reflecting a sharp reduction in credit to the government, while private sector credit increased by 17 percent. The exchange rate remained stable at around CR 3,800 per U.S. dollar throughout 1999, and was also stable in real and nominal effective terms.

Overall economic developments in the first seven months of 2000 continued to be positive. Economic activity has remained robust, especially for tourism-related services. The outlook for the remainder of 2000 is for continued real GDP growth with low inflation. Net credit to the government has decreased allowing for increased private credit to support economic recovery. By end-July, the exchange rate has depreciated by 2 percent reflecting the strengthening of the U.S. dollar; but in nominal and real effective terms the rate has been stable, and gross international reserves increased to $466 million, or 3½ months of projected imports.

Good progress was also made in the implementation of the structural reform agenda. A military census and the first stage of the civil service census have been completed, and on the basis of the AsDB-financed review of forestry concessions, the government has taken initial actions toward implementing a comprehensive reformulation of the concession management system. However, the formulation of a medium-term reform strategy for the civil service has been delayed pending the completion of several ongoing initiatives; this is now expected by March 2001. With respect to external debt, preliminary contacts were resumed regarding completing the two outstanding rescheduling agreements under the Paris Club framework with the United States and the Russian Federation.

In a letter to the Managing Director dated August 31, the Cambodian authorities have requested completion of the first review under the PRGF arrangement to enable the next disbursement from the Fund in an amount equivalent to SDR 8.36 million. A supplementary Memorandum of Economic and Financial Policies which updates the authorities' program will be made publicly available.

Executive Board Assessment

Executive Directors welcomed Cambodia's improved macroeconomic performance and progress with structural reforms, which had helped increase confidence considerably. Nevertheless, reform efforts need to be deepened in key areas for Cambodia to achieve sustainable economic growth and lasting reductions in poverty.

Directors supported the authorities' strategy of raising budgetary revenue, reducing military and other non-essential expenditure, and increasing the level and effectiveness of other expenditures so as to meet the country's pressing needs for poverty reduction and reconstruction.

Directors welcomed the authorities' success in 1999 in raising revenues. Noting the signs of a possible shortfall in revenue, they encouraged the authorities to strive for a further increase in 2000 to meet budget targets, including through the introduction of recently agreed measures. Measures that Directors considered important in raising revenue include: broadening the coverage of the VAT, improving collection from the tourism sector, and stepping up efforts to collect arrears on telecommunications services and leases of state assets. Further efforts to raise the revenue-to-GDP ratio in 2001 and beyond will be critical. The tax base should be broadened further, including through strict avoidance of ad hoc tax exemptions, and tax and customs administration should be improved. Directors noted that pre-shipment inspection for imports could be important in this regard.

Directors stressed the vital importance of further military and administrative reforms in meeting medium-term expenditure targets. Following completion of the pilot demobilization program, and to ensure the desired reduction in defense spending, Directors considered it essential to initiate the first phase of the full demobilization program by the end of 2000 as targeted. They also emphasized the need to proceed urgently with reform of the civil service so as to contain the overall wage bill, while creating a better remunerated but smaller civil service. This would assist greatly in improving the quality of public administration and the effectiveness of the government's social expenditures.

Directors encouraged the authorities to build on their efforts so as to improve the transparency and effectiveness of budget controls. They welcomed ongoing initiatives to streamline procedures for social sector spending, which are being implemented with the assistance of the World Bank and other donors. To improve governance, Directors stressed the need for effective audits of budgetary operations, and for transparent and competitive procedures for public procurement.

Directors welcomed the maintenance of a flexible exchange rate policy, and encouraged the authorities to move toward exchange market unification and acceptance of the obligations of Article VIII, Section 2, 3, and 4 during the PRGF program period. While noting the authorities' intention to reverse the dollarization of the economy, Directors observed that foreign currency deposits with local banks had continued to grow rapidly. They stressed the importance of preserving adequate foreign exchange reserve cover against these liabilities. Noting the importance of donor support and debt relief in Cambodia's external financing situation, Directors encouraged the authorities to continue their efforts to resolve outstanding issues under bilateral rescheduling agreements.

As regards the banking sector, Directors underscored the importance of completing the re-licensing of commercial banks according to the agreed schedule, and preparing the Foreign Trade Bank for eventual privatization as targeted.

In the area of forestry policy, Directors welcomed the significant progress that had been made, notably the establishment of a Forestry Crime Monitoring Unit (FCMU) and the sizable reduction in the annual allowable cuts based on the results of the concession review. They considered, however, that further decisive actions would be needed to implement a new system of concession management, revise forestry legislation, and strengthen the operations of the FCMU to ensure sustainable logging.

Directors noted the risks to the authorities' economic program stemming from administrative weaknesses in an environment of fragile governance. They emphasized the importance of sustained efforts to further improve policy implementation capacity, to promote effective public administration, and to strengthen the legal system, thereby providing a transparent framework for economic activity. Directors looked to the Fund technical assistance envisaged under the Technical Cooperation Action Plan to help in improving administrative capacity.

Directors encouraged the authorities to further improve the quality and timeliness of statistics and to participate in the Fund's general data dissemination standard.

Cambodia: Selected Economic Indicators, 1996-2000

  1996 1997 1998 1999

Output and prices 1/ (Annual percentage change)
   Real GDP 5.5 3.7 1.8 5.0 5.5
   GDP Deflator 4.6 6.0 13.1 3.8 3.2
   CPI (final quarter basis) 9.0 9.1 12.6 0.0 1.6
Government budget (In percent of GDP)
   Total revenue 9.0 9.6 9.0 11.5 11.7
   Total expenditure 16.1 13.8 14.9 15.9 17.0
    Of which: current expenditure 9.8 8.8 8.9 9.6 9.8
   Current fiscal balance -1.2 0.7 -0.3 1.8 1.8
   Overall fiscal balance (excluding grants) -7.1 -4.1 -6.0 -4.4 -5.3
Money and credit (end of period) (Annual percentage change)
   Broad money 40.5 16.6 15.7 17.3 35.5
   Private sector credit 48.5 46.4 2.8 16.6 21.9
External sector (U.S. dollars)
   Current account balance (excluding official transfers) -493 -252 -230 -346 -428
    (in percent of GDP) -15.5 -8.1 -8.2 -11.5 -13.1
   Domestic exports 295 534 610 695 730
   Retained imports 771 798 803 990 1099
   Gross official reserves 234 262 390 422 494
    (in months of imports of goods and services) 2.1 2.4 3.6 3.3 3.5
  (In percent of GDP)
External debt 2/ 21 66 73 70 35
Exchange rate (end of period)          
   Riels per U.S. dollar 2,713 3,452 3,780 3,775 ...

Sources: Data provided by the authorities; and staff estimates and projections.

1/ Based on data compiled and maintained by the National Institute of Statistics.
2/ Starting in 1997, includes debt owed to former Council of Mutual Economic Assistance.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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