Press Release No. 23/365

IMF Staff Completes 2023 Article IV Mission to Cambodia

October 31, 2023

• The Cambodian economy continues to recover from the pandemic with growth projected at 5.3 percent in 2023. Risks to the outlook stem from external challenges and weakness in parts of the real estate sector.
• Fiscal policy is appropriately expansionary this year and the deficit should start to decline in 2024. Despite a small projected increase in public debt to GDP over the medium term, risks of debt distress remain low.
• Monetary and financial measures implemented during the pandemic should continue to be fully normalized as the output gap closes, inflation remains moderate and private sector debt levels are high.

Phnom Penh, Cambodia: An International Monetary Fund (IMF) team, led by Davide Furceri, visited Cambodia during October 18-31 to hold discussions for the 2023 Article IV consultation. At the end of the mission, Mr. Furceri issued the following statement:

“The Cambodian economy is steadily recovering from the pandemic but faces domestic and external challenges. 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. The ongoing recovery in tourism and surging exports of solar panels and electrical components are the main growth drivers. Garment exports remain weak, showing only modest signs of recovery in recent months , and slower construction activity is also weighing on growth.

“After a period of declining from the peak in June last year, 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.

“Credit growth decelerated to 8.1 percent y/y in August 2023, down from 23.5 percent in 2021. Still, the private credit-GDP ratio remains elevated for Cambodia’s level of development at 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.

“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.

“Turning to policies, the fiscal position for 2023 is appropriately expansionary, given the current slack in the economy, low risk of public debt distress, declining inflation, and the limited transmission of monetary policy. Fiscal policy should turn neutral starting in 2024 if downside risks to the economy do not materialize and the fiscal deficit declines as growth strengthens. In the medium term, the key fiscal challenge is to balance developmental objectives with fiscal sustainability, given Cambodia’s significant spending needs. In this regard, a fiscal rule that combines a medium-term anchor on the debt-to-GDP ratio and an operational ceiling on the overall fiscal deficit would strengthen the fiscal framework. The framework and implementation of public investment management should be continuously strengthened to improve investment efficiency. Establishing a government bond market is important for increasing 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. The authorities have been moving in this direction. Going forward, monetary policy decisions should continue to remain data-dependent and be flexible to adjust to output and inflation shocks. The ongoing modernization of the monetary and exchange policy framework is important to enhance monetary transmission and support de-dollarization. The ultimate goal is to move from a de facto exchange rate targeting framework to a more direct targeting of inflation.

“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. In this context, the full phase out of loan forbearance and the issuance of several regulations strengthening capital adequacy and risk management are welcome. Efforts to strengthen the supervisory framework, including by transitioning to risk-based supervision and implementing Basel III, should continue, and data gathering and analysis capacity strengthened.

“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. We encourage the authorities to 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. The recent diversification of manufacturing into solar panels and electrical components is encouraging in this context. Enhancing public governance and transparency will be vital to attract more foreign direct investment and to ensure macroeconomic stability. Better macroeconomic data would benefit monitoring of the economy and policymaking. The IMF will continue to provide technical assistance to help improve statistics, and in other areas of capacity development.

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 wishes to express its deep appreciation to the authorities and other stakeholders for open and constructive discussions.