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.
