Press Release No. 17/298

IMF Staff Completes 2017 Article IV Visit to Cambodia

July 25, 2017

• Growth is projected to remain robust at around 7 percent in 2017–18.
• Structural reforms are needed to increase competitiveness and encourage diversification through lower energy costs, better human capital and infrastructure, and stronger rule of law and transparency.
• There’s a need to contain near-term fiscal deficits, strengthen tax administration and policies, prioritize productive pro-development spending and ensure that public wage increases remain sustainable.

An International Monetary Fund (IMF) team from Washington, D.C., headed by Mr. Jarkko Turunen, visited Phnom Penh and Sihanoukville from July 12 to 25, 2017, to conduct discussions on the annual Article IV review of the Cambodian economy. ^[1] Mr. Markus Rodlauer, Deputy Director of the Asia Pacific Department of the IMF, joined the final policy discussions.

At the conclusion of the visit, Mr. Turunen issued the following statement:

“Cambodia continues to grow at an impressive pace. Economic activity remained strong in 2016, while inflation rose to 3 percent, driven by higher food and energy prices. Growth is projected to remain robust at around 7 percent in 2017–18, with moderating private investment offset by higher public spending and robust construction and tourism activity. The current account deficit narrowed to 8.8 percent of GDP in 2016. Supported by the lower current account deficit and strong FDI inflows, foreign reserves continued to grow, reaching US$7.9 billion in June 2017.

“Cambodia’s economic outlook is positive, although there are downside risks. Our discussions focused on three areas: (i) managing macro-financial risks, (ii) safeguarding fiscal sustainability, and (iii) accelerating reforms to support growth, resilience and inclusion.

“Rapid credit growth over the past several years has led to a significant increase in the bank credit-to-GDP ratio to close to 70 percent. To mitigate financial stability risks, the National Bank of Cambodia has taken several welcome macroprudential policy measures, including implementation of the Liquidity Coverage Ratio and higher minimum capital requirements; bank-specific prudential measures on institutions deemed to be taking excessive risks; and liquidity-providing collateralized operations to provide lower-cost riel funds. Partly as a result of these measures, credit growth has moderated this year, although the credit-to-GDP ratio is still increasing and a sizeable part of bank credit continues to be funded from abroad.

“The authorities should continue to take measures to improve resilience and address elevated financial sector vulnerabilities, such as better managing credit risks, introducing targeted macroprudential policies, developing a crisis management framework, and upgrading regulation of non-bank financial institutions.

“Prudent fiscal management in recent years has kept fiscal deficits in check and public debt low. Implementation of the government’s Revenue Mobilization Strategy (RMS), coupled with robust growth, has seen tax revenues increase significantly to over 15 percent of GDP in 2016. But this year the fiscal deficit is projected to widen to about 3.7percent of GDP, owing to higher public sector wages and other current spending. Looking ahead, Cambodia will face rising spending pressures and, unless the RMS is re-invigorated, revenue growth is expected to moderate.

“Therefore, additional measures are needed to safeguard fiscal sustainability and achieve a growth- and development-friendly expenditure mix. In particular, we see a need to contain near-term fiscal deficits, strengthen tax administration and policies, prioritize productive pro-development spending and ensure that public wage increases remain sustainable and are accompanied by further progress in public administration reforms. There is also room to improve the public-private partnership framework to help manage fiscal costs and risks, while addressing infrastructure bottlenecks.

“Cambodia has grown rapidly over the past few decades, supported by a stable macroeconomic environment, an open and market-oriented economy, its location in the world’s fastest-growing region, and its relatively young population. Poverty has declined, although a significant share of the population remains vulnerable. That said, Cambodia also faces structural constraints, including a narrow economic base, weak business climate and still underdeveloped financial markets. These constraints limit growth potential and render the economy and financial system vulnerable to shocks.

• Structural reforms are needed to increase competitiveness and encourage diversification through lower energy costs, better human capital and infrastructure, and stronger rule of law and transparency. Accelerated implementation of the Industrial Development Policy would spur growth of small-and-medium-sized enterprises and help Cambodia find a place in regional value chains. Internalizing the impact of climate change on climate sensitive sectors, including agriculture, and spillovers to other sectors, in policy design would help improve resilience.

• Promoting further financial market development and reforms to encourage local currency use would help increase resilience. The authorities have taken welcome measures to promote local currency use, including to require a minimum of 10 percent of the loan portfolio to be in riel and calling for businesses to post prices in riel. Further measures such as continuing to promote the development of interbank, government bond, and foreign exchange markets are needed to encourage riel use and allow for the eventual implementation of an effective monetary policy framework.

• Use of financial technology, developing financial infrastructure and improving financial literacy can help expand financial inclusion. Financial inclusion has improved, including through access to MFI credit and emerging use of mobile services. However, large gaps remain. Continued efforts are needed to improve financial literacy and reduce costs, expand products, and improve consumer protection. A comprehensive financial inclusion strategy would help address risks and safeguard financial stability while at the same time fostering innovation and competition.

  “Given the authorities’ strong commitment and determination, we are confident that Cambodia will continue to build on its economic achievements over the last few decades and successfully navigate the challenges ahead.

“The team held constructive and candid discussions with senior officials of the Royal Government of Cambodia, National Bank of Cambodia, and other public agencies, as well as a wide range of stakeholders, including representatives of the business and banking sectors, think tanks, and development partners. We would like to express our sincere appreciation to the Cambodian authorities for their hospitality and productive discussions over the last two weeks.”