IMF Staff Completes 2021 Article IV Mission to Cambodia

IMF News, September 28, 2021

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COVID-19 caused a collapse in external demand in 2020 and community spread of the virus in 2021.
Growth outcomes and projections:
- Growth is estimated to have contracted by 3.1 percent in 2020.
- Growth had been nearly 7 percent in previous years.
- A recovery with extensive government support and improved external demand: growth of around 2 percent this year and 5 percent next year is expected.
- Staff projects growth of 2.2 percent in 2021, increasing gradually to pre-crisis rates of 6½ percent after a few years.
Inflation:
- Inflation is expected to remain contained.
- With non-food and energy inflation subdued, overall inflation is projected to continue around 3 percent.

Tax revenues have suffered with the downturn while demands on healthcare and social assistance have increased in 2021.
Fiscal deficits and public debt:
- Fiscal deficits are expected to widen to nearly 6 percent in 2021 (in the Government Finance Statistics Manual 2014 format).
- Public debt is now 36 percent of GDP.
- With growth and appropriate policies, deficits are expected to shrink, containing debt to around 40 percent of GDP over the medium term.
Policy guidance for fiscal policy:
- Continued restraint on other current spending and careful calibration of capital spending to ensure financing needs can be met by existing government savings and existing external financing sources.
- Strong implementation of the authorities’ Revenue Mobilization Strategy to mitigate damage to tax revenues.
- Tax and fee exemptions granted to support the economy should be explicitly time bound or contingent on economic recovery and should be costed.
- Frame interventions within a well-defined medium-term fiscal framework—including a fiscal anchor, overall spending priorities, and financing strategy—to ensure confidence in public finances.

Current account:
- The current account deficit is expected to widen in 2021, to around one quarter of GDP.
Financial inflows and reserves:
- Financial inflows—mainly in the form of Foreign Direct Investment—are expected to remain strong, and FX reserves sufficient.

Banking system support during the crisis:
- National Bank of Cambodia (NBC) introduced measures early in the crisis to improve liquidity in the banking system and issued guidance to banks to facilitate loan restructuring.
Sector vulnerabilities and policy measures:
- Risks from before the pandemic include concentration of banking sector assets in real estate.
- As crises have strained the ability of households and firms to service loans, healthy banks are essential for a durable recovery.
- Commendation of the NBC for enhancing reporting requirements to assist close monitoring of banks’ positions.
- Recommendation for a carefully calibrated sequence of steps to gradually return to standard prudential requirements.
- To strengthen the financial safety net, it is indispensable to implement bank resolution legislation and a deposit protection scheme.

Reform priorities to build resilience:
- Encourage sectoral diversification.
- Decrease informality and reduce red tape.
- Increase adaptability to climate change.
- Develop a domestic bond market to broaden financing options.
- Strengthen anti-corruption and financial integrity: work of the Anti-Corruption Unit and Cambodia Financial Intelligence Unit (CAFIU) is crucial; more rapid progress to apply the recommendations of the Financial Action Task Force will help with access to a broader range of foreign financing options.
Public investment priorities:
- Demands for public spending will likely remain high for emergency measures and long-term development goals such as investment in human capital, infrastructure, and climate adaptation.
- The government’s plans prioritize healthcare and social assistance.

Pandemic dependence:
- Future growth depends heavily on the course of the pandemic.
- Faster containment in Cambodia and other countries will facilitate resumption of tourism; slower progress would damage growth further.
- Risks appear skewed to the downside at this stage.
Other risks:
- Pre-pandemic vulnerabilities including concentration of banking sector assets in real estate.
- Past droughts and floods have demonstrated vulnerability to climate change.

Mission details:
- An IMF team led by Alasdair Scott held virtual meetings with the Cambodia authorities on the 2021 Article IV consultation during September 13-27, 2021.
- End-of-mission press release conveys preliminary findings; staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.
IMF commitment:
- The IMF stands ready to support the authorities’ reform efforts through policy advice and capacity development activities.
Appreciation:
- The IMF team held 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, and development partners, and expresses deep appreciation for open and constructive discussions.

IMF Staff Completes 2021 Article IV Mission to Cambodia — Press Release No. 21/276 (September 28, 2021).