IMF Staff Completes 2023 Article IV Mission to Cambodia

IMF News, October 31, 2023

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IMF team led by Davide Furceri visited Cambodia during October 18-31 to hold discussions for the 2023 Article IV consultation.
Press Release No. 23/365.
End-of-Mission press releases convey preliminary findings; views are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.

"The Cambodian economy continues to recover from the pandemic with growth projected at 5.3 percent in 2023."
Growth accelerated to 5.2 percent in 2022 from 3 percent in 2021, driven by strong manufacturing and a recovery in the services sector.
The economy is projected to expand by 5.3 percent in 2023 and 6.0 percent in 2024.
Main growth drivers: ongoing recovery in tourism and surging exports of solar panels and electrical components.
Garment exports remain weak, showing only modest signs of recovery in recent months, and slower construction activity is weighing on growth.

Inflation rebounded to 3.8 percent in September 2023 due to higher food and fuel prices.
For the full year 2023, inflation is expected to average 2.3 percent and converge to its long-term trend, around 3 percent, by 2024 absent further commodity price shocks.
"The current account deficit narrowed in 2022 and is expected to gradually fall further, mainly due to the strong recovery in non-garment exports, tourism and remittance flows."
International reserves are expected to remain stable.

"The fiscal deficit is expected to widen this year to 3.6 percent, mainly reflecting higher one-off spending needs."
The deficit is projected to fall to 2 percent in 2024 and reach about 2.5 percent in the medium term, as temporary support measures for the pandemic and rising cost of living are removed, and revenues improve owing to tax and customs administration reforms.
Public debt to GDP is projected to increase moderately during the next decade and the risk of debt distress remains low, although there are vulnerabilities from shocks to exports and growth.
Policy recommendation: fiscal policy should turn neutral starting in 2024 if downside risks do not materialize and the fiscal deficit declines as growth strengthens.
Policy recommendation: consider a fiscal rule that combines a medium-term anchor on the debt-to-GDP ratio and an operational ceiling on the overall fiscal deficit to strengthen the fiscal framework.
Policy recommendation: continuously strengthen public investment management to improve investment efficiency.
Policy recommendation: establish a government bond market to increase the share of market-based and domestically financed government debt.

"Monetary and financial measures implemented during the pandemic should continue to be fully normalized to ensure a neutral stance in 2024 as the output gap closes and inflation remains moderate."
Recommendation: monetary policy decisions should remain data-dependent and be flexible to adjust to output and inflation shocks.
Recommendation: continue modernization of the monetary and exchange policy framework to enhance monetary transmission and support de-dollarization, with the ultimate goal to move from a de facto exchange rate targeting framework to a more direct targeting of inflation.
Credit growth decelerated to 8.1 percent y/y in August 2023, down from 23.5 percent in 2021.
The private credit-GDP ratio remains around 160 percent.
Non-performing loans rose to 4.6 percent of total loans in August reflecting a roll-back in forbearance measures and potentially rising stresses in parts of the economy.
"The banking sector is well capitalized and profitable according to financial soundness indicators, but the recent deterioration in asset quality and the high level of private sector debt require close monitoring."
Welcome measures: full phase out of loan forbearance; issuance of regulations strengthening capital adequacy and risk management.
Recommendation: continue efforts to strengthen the supervisory framework, including transitioning to risk-based supervision and implementing Basel III, and strengthen data gathering and analysis capacity.

"The authorities’ implementation of the Action Plan they agreed upon with the Financial Action Task Force to strengthen the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework is commendable, and enabled Cambodia to exit from the FATF list of Jurisdictions under Increased Monitoring in February 2023."
Recommendation: continue to strengthen the AML/CFT framework.

Structural reforms should focus on diversifying trade partners, investing in new growth drivers, and capitalizing on climate transition opportunities.
Positive development: diversification of manufacturing into solar panels and electrical components.
Recommendation: enhance public governance and transparency to attract more foreign direct investment and ensure macroeconomic stability.
Recommendation: improve macroeconomic data; IMF will continue to provide technical assistance to help improve statistics and in other areas of capacity development.

"Uncertainty around the outlook is high and risks are to the downside, notably weaker-than-projected demand from advanced economies and China, tighter US monetary policy, geoeconomic fragmentation, and high levels of domestic private debt."
Specific vulnerabilities cited: shocks to exports and growth; high private sector debt; deterioration in asset quality in parts of the banking sector.

The IMF team held discussions with senior officials of the Royal Government of Cambodia, the National Bank of Cambodia, and other public agencies, as well as representatives of the business and banking sectors, and development partners.
The team expressed deep appreciation to the authorities and other stakeholders for open and constructive discussions.

IMF Communications Department — MEDIA RELATIONS; PRESS OFFICER: Huong Lan Vu; Phone: +1 202 623-7100; Email: MEDIA@IMF.org