Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation with Cambodia

July 20, 2006

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2006 Article IV Consultation with Cambodia is also available.

Public Information Notice (PIN) No. 06/78
July 20, 2006

On July 7, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Cambodia.1


Cambodia has enjoyed a broad degree of macroeconomic stability in recent years, underpinned by prudent fiscal and monetary policies. The economy has successfully created new jobs to absorb the rising working age population, which has been growing at 3 percent annually, faster than the population. Inflation has remained under control. The economy has withstood pressures from high world oil prices, albeit with a small deterioration in the balance of payments. The external debt burden has eased to 51 percent of GDP in 2005, from a peak of 60 percent in 2003. Nevertheless, the country remains poor and governance weaknesses limit both critical spending and the environment for broad-based development. Growth has been narrowly based on garment exports and tourism and thus while the overall poverty rate has declined—from 47 percent in 1993 to 35 percent in 2004—rural poverty remains stubbornly high, and many Millennium Development Goals appear beyond reach. Low revenue has led to development spending shortfalls while corruption has contributed to poor government operations and high costs of doing business.

Real GDP growth rose to 13½ percent in 2005 with all sectors contributing. Largely because of exceptionally favorable weather conditions, following a drought in 2004, agriculture output grew by around 17 percent. Contrary to earlier concerns of a large negative impact of the termination of MFA quotas, with the introduction of safeguard restrictions put in place by the United States and European Union, garment exports continued to expand in 2005, albeit at a slower pace. After increasing by 50 percent in 2004, tourist arrivals rose by 35 percent in 2005 to nearly 1½ million with a related increase in construction activity. Inflation remained under control—at end-April 2006, inflation had eased to below 5 percent as the effect of the 2004 drought on food prices and oil-price shock diminished.

Fiscal policy was cautious, as expenditure restraint and slower donor project execution led to a decline in the overall deficit to 3½ percent of GDP in 2005, from 4¾ percent in 2004. The deficit was again more than financed by external aid. Despite greater than budgeted tax revenues and one-off receipts from the privatization of a state bank, the revenue to GDP ratio in 2005 was only 10½ percent. Expenditure declined as a share of GDP as capital spending continued its downward trend—in line with external financing—and current spending grew only moderately.

Financial intermediation continued to expand, in the context of extremely high dollarization. Broad money and bank deposits grew by about 16 percent (year-on-year) in 2005 and have picked up pace in early 2006. The banking system, however, remains relatively undeveloped and concentrated—financial intermediation remains low—private sector credit averaged less than 10 percent of GDP in 2005, allocated mainly to the services and retail sectors.

External developments were mixed. Robust tourism earnings and tourism only partly offset higher petroleum prices and strong non-garment imports. The current account deficit (excluding transfers) widened to 9½ percent of GDP in 2005, but this was financed by an upswing in foreign direct investment, concentrated in garment, tourism, and construction sectors. The riel was fairly stable both in terms of dollars and partner country currencies.

Progress has been made on the wide-ranging structural reform agenda. The authorities are implementing their flagship public financial management (PFM) reform program, which addresses the weaknesses of Cambodia's public expenditure management system. In the area of land policy, the issuances of sub decrees on economic land concessions and on state land management were significant developments.

Executive Board Assessment

Executive Directors commended the Cambodian authorities for their sound macroeconomic policies, which have contributed to the strong growth performance of recent years. The fiscal position has improved, inflation remains under control, structural reforms have been implemented in key areas, and poverty has fallen significantly. Directors considered that, in the period ahead, the authorities should place emphasis on improving governance and the investment climate, to lay the groundwork for faster and broader-based private sector growth and to allow for reducing reliance on aid inflows over the long term.

Directors welcomed the government's commitment to reorient expenditure toward achieving the Millennium Development Goals (MDGs). They observed that greater stress is appropriately being placed under the National Strategic Development Plan (NSDP) on reducing poverty, enhancing physical infrastructure, and improving social services. Given that poverty in rural areas is still high, Directors also endorsed the NSDP's intention to channel more resources to increasing agricultural productivity. They encouraged the authorities to strengthen further the costing and prioritization of the NSDP. They commended the authorities' intention to use resources freed up by the Multilateral Debt Relief Initiative (MDRI) to further strengthen poverty reduction efforts.

At the same time, Directors expressed concern that revenue collection continues to be well below what is needed to support the government's expenditure objectives. They called for the full enforcement of current tax regulations and a reining-in of tax exemptions, and they endorsed the authorities' intention to enhance revenue administration. They suggested that additional tax policy measures be considered in the 2007 budget. Directors recommended that the authorities take early measures to ensure that future proceeds from the exploitation of recently discovered petroleum reserves, which could be substantial, are well managed. In that connection, they called on the authorities to participate soon in the Extractive Industries Transparency Initiative.

Directors endorsed the current approach to monetary policy, which is constrained by the high degree of dollarization. De-dollarization should remain a long-term objective. Directors supported the National Bank of Cambodia's (NBC) policy of stabilizing excessive fluctuations in the exchange rate, while allowing the rate to adjust to shifts in underlying market fundamentals. They encouraged the government to continue deepening Cambodia's integration into the region.

Directors called on the government to strengthen the financial infrastructure through enhanced supervision—particularly of the dominant banks—and enforcement, and through the development of a more effective payments system. They urged the NBC to limit exemptions on prudential requirements, especially on capital requirements and large exposure limits. They encouraged the NBC to continue to address weaknesses in its internal control, accounting, and auditing procedures, as identified in the safeguards assessment. Directors welcomed the submission to parliament of a draft law to combat money laundering and the financing of terrorism.

Directors encouraged the authorities to continue their prudent borrowing policy—limiting non-concessional foreign financing. They observed that although the path of external debt is sustainable, the small and narrow revenue base presents risks. Directors looked forward to an early resolution of outstanding official bilateral debt issues, which could clear the way for Fund financial support within the PRGF framework.

Directors encouraged the authorities to accelerate structural reforms to promote equitable growth, increase competitiveness, and reduce the vulnerability of the economy to risks. They welcomed the government's commitment to the comprehensive public financial management reform program, which should make spending more effective. They encouraged the authorities to hasten the program's implementation, in particular by introducing the new Chart of Accounts for the 2007 budget and by rationalizing government bank accounts.

Directors stressed the need to improve governance to enhance the business environment and strengthen revenue collection. They emphasized the importance of civil service reform to fight corruption, and urged the authorities to make full use of current regulations to guard against misuse of funds and to investigate irregularities. They called for the promulgation of an anti-corruption law of international standard, and the prompt establishment of an anti-corruption secretariat.

Directors noted the considerable improvement in statistics in recent years, and encouraged the government to ensure that adequate budget resources are allocated to this area so that the macroeconomic and social objectives of the NSDP can be properly monitored.

Cambodia: Selected Economic Indicators, 2002-2005


2002 2003 2004 2005



  (Annual percent change)

Output and prices


Real GDP

6.2 8.6 10.0 13.4

GDP deflator

1.4 0.2 5.3 5.7

CPI Inflation (end of period)

3.7 0.5 5.6 6.7

Money and credit


Broad money

33.0 15.0 30.4 16.1

Net credit to the government

-2.0 -0.3 -2.4 -4.9

Private sector credit

13.1 26.2 35.9 29.4
  (In percent of GDP)

Government budget


Total Revenue

10.5 9.7 10.4 10.5


16.7 15.7 15.2 13.9

Of which: current expenditure

9.4 10.1 9.0 8.2

Current budget balance

1.1 0.4 1.3 1.6

Overall budget balance

-6.3 -6.0 -4.7 -3.4

Overall budget balance (incl. grants)

-3.6 -3.7 -3.0 -1.3
  (In millions of U.S. dollars; unless indicated)

External sector


Current account (excl. official transfers)

-406 -497 -440 -594

(in percent of GDP)

-9.5 -10.8 -8.4 -9.5


1,659 1,970 2,454 2,773


2,275 2,759 3,166 3,882

Gross official reserves

663 737 806 915

(in months of imports of goods and services)

2.9 2.8 2.6 2.4

Public external debt

2,492 2,740 2,976 3,180

(in percent of GDP)

58.2 59.8 56.6 50.6

Exchange rate (riels per dollar; end of period)

3,935 3,980 4,031 4,116

Source: Cambodian authorities.

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.


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