Public Information Notice: IMF Concludes Article IV Consultation with Cambodia
IMF News, April 6, 1999
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- Published: April 6, 1999
Background
- Domestic political uncertainty and the onset of the Asian financial crisis led to a deterioration in macroeconomic performance in the second half of 1997.
- Downward trend continued through the period leading up to the July 1998 elections and its aftermath; governance in the forestry sector and budgetary management deteriorated markedly.
- Formation of a new government in November 1998 positively affected public confidence; economic activity, particularly in tourism and retail trade, started to pick up in late 1998.
- For 1998 as a whole, no growth in output was estimated.
- The 12-month rate of inflation was 13 percent at the end of the year, down from 19 percent in the middle of the year.
- The exchange rate against the U.S. dollar stabilized in the last few months of the year, following a 10 percent depreciation during the first half of the year.
- The trade balance improved slightly in 1998.
- National Bank of Cambodia (NBC) accumulated US$13 million in international reserves in addition to the US$117 million in gold holdings released by the BIS in May 1998.
- Exports were buoyed by a booming garment sector; import growth was modest, reflecting weak economic activity and reductions in aid flows.
- Fiscal performance: revenue amounted to only 8½ percent of GDP amid extensive ad hoc tax exemptions; current expenditure at 9 percent of GDP exceeded budget provisions; development expenditure was 3½ percent of GDP; overall deficit amounted to 4 percent of GDP with significant recourse to central bank financing.
- Broad money grew by 16 percent in 1998; currency in circulation rose sharply; foreign currency deposits showed zero growth in domestic currency terms.
- Credit to the private sector decreased by 6 percent in U.S. dollar terms.
- Commercial bank interest rates remained broadly unchanged at around 19 percent for dollar-based lending, 2–3 percent for dollar term deposits, and 7–8 percent for riel term deposits.
- Little advance in key structural reform areas—forestry, governance in fiscal management, civil service and military reform—during 1998.
- New coalition government formed November 1998; Prime Minister Hun Sen promised broad fiscal reform, less spending on defense and security, and tough action against corruption, illegal logging, and crime.
- Government regained UN seat in early December and was accepted for membership in ASEAN in March 1999.
- Donors at the Consultative Group Meeting in Tokyo (February 25–6, 1999) expressed strong support for initiatives to control illegal logging and restart reform, but cautioned these efforts need to be sustained and carefully monitored.
- IMF staff and authorities focused policy discussions on restoring macroeconomic stability and resuming structural reforms to lay the foundation for sustainable medium-term growth.
Executive Board Assessment
- Directors were disappointed that in 1998 economic growth halted, the riel depreciated, inflation increased considerably, and there was little tangible progress on key structural reforms.
- Particular concern about continued poor fiscal performance: extensive ad hoc tax exemptions, overspending on the military budget, and sizeable central bank financing of the government.
- Directors welcomed authorities’ commitment to improve governance and economic policies and urged full implementation.
- Emphasized critical need to:
- increase transparency and accountability,
- adhere to the rule of law,
- take decisive actions against corruption and illegal logging,
- improve fiscal management.
- Directors urged decisive action to address illegal logging; enforcement of the recent prohibition against illegal logging activity and exports needed to be vigorous and consistent nationwide.
- Directors welcomed the 1999 budget as a step toward improving fiscal management and achieving a sustainable fiscal position over the medium term.
- Directors saw introduction of the value-added tax as important for strengthening revenue performance and encouraged full implementation.
- Encouraged authorities to:
- strictly maintain the prohibition on ad hoc import duty and tax exemptions,
- fully collect revenues from line ministries,
- revise existing contracts for forest concessions to provide increased timber royalties,
- shift spending away from defense and security toward health, education, and civilian operations and maintenance,
- pursue civil service reform and demobilization of defense and security forces to support reorientation of spending.
- On monetary policy, Directors recommended maintaining a freeze on central bank credit to the government to provide adequate credit to the private sector and to pursue macroeconomic stability to promote acceptance of the local currency and confidence in the domestic banking system.
- Directors endorsed the flexible exchange rate regime and supported the objective of reducing the spread between official and parallel market rates.
- Encouraged speeding up conclusion of remaining bilateral agreements under the Paris Club accord and avoiding further accumulation of external payment arrears.
- Emphasized need to address serious deficiencies in the financial sector: early adoption and implementation of the Commercial Bank Law, strengthen supervisory capacity, and continue on-site inspections by internationally recognized firms.
- Urged improvement of the macroeconomic database and regular, timely dissemination of economic statistics.
- Directors considered the improved political stability a unique opportunity to accelerate reforms; meaningful reform measures already announced should be implemented consistently, fully, and in a sustained manner to form the basis for a new ESAF-supported program in the future and to help mobilize donor support.
Selected Economic Indicators, 1995–98 (exact values)
- Real GDP (annual percentage change): 1995: 7.6; 1996: 7.0; 1997: 1.0; 1998: 0.0
- Consumer prices (final quarter-basis, annual percentage change): 1995: 3.5; 1996: 9.0; 1997: 9.1; 1998: 12.6
- Total revenue (percent of GDP): 1995: 8.9; 1996: 9.7; 1997: 8.5; 1998: (blank in source table)
- Total expenditure (percent of GDP): 1995: 16.7; 1996: 16.3; 1997: 13.9; 1998: 12.5
- Current expenditure (percent of GDP): 1995: 9.6; 1996: 9.9; 1997: (blank); 1998: (blank)
- Capital expenditure (percent of GDP): 1995: 7.1; 1996: 6.4; 1997: 5.0; 1998: 3.6
- Overall balance (percent of GDP): 1995: -7.7; 1996: -7.2; 1997: -4.3; 1998: -3.9
- Domestic investment1 (percent of GDP): 1995: 21.8; 1996: 25.9; 1997: 19.0; 1998: 15.0
- National saving (percent of GDP): 1995: 10.6; 1996: 10.5; 1997: 5.8; 1998: (blank)
- Broad money2 (percent change, end of year): 1995: 44.3; 1996: 40.4; 1997: 16.6; 1998: 15.7
- Of which: Riels in circulation (percent change): 1995: 42.3; 1996: 19.5; 1997: 18.8; 1998: 43.0
- Private sector credit3 (percent change, in U.S. dollar terms): 1995: 26.1; 1996: 37.9; 1997: -6.0; 1998: (blank)
- Exports, f.o.b. (in millions of U.S. dollars4): 1995: 269; 1996: 328; 1997: 535; 1998: 603
- Imports, f.o.b. (in millions of U.S. dollars4): 1995: -693; 1996: -787; 1997: -804; 1998: -831
- Current account (excluding official transfers, in millions of U.S. dollars4): 1995: -494; 1996: -480; 1997: -263; 1998: -262
- Current account (excluding official transfers, in percent of GDP): 1995: -16.8; 1996: -15.3; 1997: -8.5; 1998: -9.2
- Gross official reserves (in millions of U.S. dollars4): 1995: 40; 1996: 42; 1997: 22; 1998: 8
- Gross official reserves (in millions of U.S. dollars4) shown also as 182, 234, 262, 390 in another row of the source table (as presented)
- Gross official reserves (in months of imports): 1995: 1.5; 1996: 2.0; 1997: 2.2; 1998: 3.1
- Debt service6 (percent of domestic exports of goods and services): 1995: 3.4; 1996: 5.1; 1997: 2.3; 1998: 2.6
- Riels per US$ (end-period): 1995: 2,526; 1996: 2,713; 1997: 3,460; 1998: 3,780
Notes from source table:
- 1 Includes externally financed technical assistance for implementation of capital projects.
- 2 Includes foreign currency deposits.
- 3 In U.S. dollar terms.
- 4 Unless otherwise indicated.
- 5 Excludes re-exports.
- 6 In percent of domestic exports of goods and services.
Policy recommendations and priorities (summarized)
- Implement announced governance and anti-corruption measures fully and consistently.
- Enforce prohibition on illegal logging and exports vigorously and nationwide.
- Implement the value-added tax and strengthen tax administration; maintain prohibition on ad hoc tax and duty exemptions; fully collect revenues from line ministries.
- Revise forest concession contracts to increase timber royalties.
- Reorient spending away from defense and security toward health, education, and civilian operations and maintenance.
- Pursue civil service reform and demobilization of defense and security forces.
- Maintain freeze on central bank credit to the government to ensure credit availability to the private sector.
- Pursue macroeconomic stability to build confidence in the riel and domestic banking system.
- Speed up completion of remaining bilateral agreements under the Paris Club accord and avoid further external payment arrears.
- Adopt and implement the Commercial Bank Law; strengthen supervisory capacity and continue on-site bank inspections by internationally recognized firms.
- Improve the macroeconomic database and disseminate economic statistics regularly and timely.
Public Information Notice: IMF Concludes Article IV Consultation with Cambodia, April 6, 1999.