IMF Executive Board Concludes 2023 Article IV Consultation with Cambodia
January 31, 2024
Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Cambodia and endorsed the staff appraisal without a meeting on a lapse-of-time basis.
Cambodia is on a recovery trajectory post-pandemic, with a GDP growth of 5.2 percent in 2022. The manufacturing sector has been the cornerstone of this recovery, adding over 3 percent to the real GDP. While agriculture faced challenges due to weather and rising costs, the service sector made a strong comeback. Electronics exports, particularly solar panels, have shown resilience, offsetting a decline in garment exports. Tourism is also recovering, boosted by the 2023 South-East Asia Games.
Inflation has been volatile and after a period of declining from the peak in June last year, it rebounded to 3.9% in October due to higher food and fuel prices. The central bank has gradually unwound pandemic-era support measures, including increasing reserve requirements for foreign currencies. Fiscal positions have improved in 2022 due to stronger-than-expected revenue performance. The current account deficit has also narrowed, primarily due to reduced gold imports.
The economy is projected to grow by 5.3 percent in 2023, fueled by a resurgence in tourism and strong performance in non-garment exports. However, risks are skewed to the downside. Weaker-than-expected growth in the U.S., accounting for over 40 percent of Cambodia's exports, and China pose significant risks. Additionally, U.S. monetary tightening and high levels of private debt in Cambodia could impact growth. Geopolitical tensions and trade policy uncertainties add another layer of risk, as do commodity price fluctuations and climate events.
The fiscal deficit is expected to widen in 2023 due to a combination of factors: extended targeted social supports to households and firms affected by the COVID-19 pandemic and the cost-of-living crisis; increased spending associated with the 2023 South-East Asia Games and the General Election; and the finalization of incomplete infrastructure projects from 2022. Starting from 2024, the deficit is projected to narrow in line with the authorities’ commitment to scaling back temporary support measures (including cash transfers), while retaining targeted fiscal support to the poor through social protection system reform. 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.
Executive Board Assessment2
The Cambodia economy is continuing to recover from the pandemic. The economy achieved 5.2 percent growth in 2022 and is projected to grow by 5.3 percent in 2023. The main drivers of growth are the expansion of non-garment goods exports and a rebound in tourism. But garment exports, a major contributor to growth in the past, remains weak. And the compositional shift in tourist arrivals means the country is receiving less income per tourist compared to the pre-pandemic era.
Though the rebound has continued, downside risks are significant. The near-term threats to growth include continued demand weakness from advanced-economy trade partners, recovery slowdown in China, high level of private debt domestically and tighter global financial conditions. Over the medium term, geopolitical tension and trade fragmentation, structural decline in growth from China, as well as climate change may pose important challenges to growth.
Fiscal policy in 2023 was appropriately expansionary, but as recovery progresses, fiscal consolidation should start. The fiscal stance should return to neutral in 2024 as pandemic-related spending needs subside and economic recovery continues. Over the medium term, strengthening tax base as well as tax and customs administration is crucial for safeguarding revenues, especially given the revenue erosion from various tax incentives and the already low revenue-to-GDP ratio. Improving evaluation and execution of public investments will ensure spending is appropriately directed to support economic development.
Monetary policy needs to continue normalizing towards the pre-pandemic setting. The phasing out of pandemic-related forbearance measures and the increase of USD reserve requirement are welcome. NPLs should continue to be adequately provisioned for. After the breakneck expansion in recent years, credit growth should be allowed to recalibrate, to reflect a normalization of financial conditions, especially given the high private sector indebtedness. Improvement in supervisory framework, as well as in data gathering and analysis, should continue. Legal and operational frameworks for corporate insolvency and bank resolution need to be strengthened.
To ensure sustained progress in elevating living standards over the medium term, substantial reforms are needed. Provision of human capital, both quality and quantity, needs to improve to accommodate the changing needs of the economy, as the comparative advantage in labor cost diminishes at a higher income level. Investments in key infrastructure, such as in transportation, energy, logistics and telecommunication, will support more diversified industries and increase the scale of operation.
Governance and anti-corruption reforms are important to attract new FDIs and sustain high growth. Improvements in public governance and anti-corruption will reduce the cost of doing business, help draw investments from a wider range of source countries and improve Cambodia’s attractiveness as a tourist destination. It is critical to strengthen frameworks on asset declarations, whistleblower protection and access to information. Adequate resources and authorities should be allocated to oversight and investigative bodies.
|
2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
2028 |
|
|
Proj. |
|||||||||
|
Output and prices (annual percent change) |
|||||||||
|
GDP in constant prices |
-3.1 |
3.0 |
5.2 |
5.3 |
6.0 |
6.4 |
6.5 |
6.2 |
6.3 |
|
Inflation (end-year) |
2.9 |
3.7 |
2.9 |
3.7 |
3.0 |
3.0 |
3.0 |
3.0 |
3.0 |
|
(Annual average) |
2.9 |
2.9 |
5.3 |
2.3 |
3.0 |
3.0 |
3.0 |
3.0 |
3.0 |
|
Saving and investment balance (in percent of GDP) |
|||||||||
|
Gross national saving |
21.5 |
-18.1 |
-1.6 |
22.4 |
18.6 |
18.5 |
18.5 |
18.4 |
18.1 |
|
Government saving |
3.5 |
0.4 |
3.1 |
4.1 |
5.1 |
6.1 |
7.1 |
8.1 |
9.1 |
|
Private saving |
18.1 |
-18.5 |
-4.7 |
18.3 |
13.5 |
12.4 |
11.4 |
10.4 |
9.0 |
|
Gross fixed investment |
24.9 |
23.9 |
24.5 |
24.5 |
24.5 |
24.5 |
24.5 |
24.5 |
24.5 |
|
Government investment |
8.8 |
9.0 |
7.7 |
10.8 |
8.1 |
8.4 |
8.7 |
8.6 |
8.7 |
|
Private investment |
16.1 |
14.9 |
16.8 |
13.7 |
16.4 |
16.1 |
15.8 |
15.9 |
15.8 |
|
Money and credit |
|||||||||
|
Broad money |
15.3 |
16.4 |
8.2 |
14.9 |
11.0 |
12.3 |
11.4 |
12.8 |
8.3 |
|
Private sector credit |
17.2 |
23.6 |
18.5 |
11.0 |
13.0 |
13.5 |
13.5 |
13.5 |
13.5 |
|
Velocity of money 1/ |
0.8 |
0.8 |
0.7 |
0.7 |
0.7 |
0.6 |
0.6 |
0.6 |
0.6 |
|
Public finance (in percent of GDP) |
|||||||||
|
Revenue |
23.9 |
21.6 |
23.9 |
23.0 |
23.2 |
23.3 |
23.4 |
23.5 |
23.6 |
|
Domestic revenue |
22.0 |
20.0 |
22.2 |
21.7 |
21.9 |
22.0 |
22.1 |
22.2 |
22.4 |
|
Of which: Tax revenue |
19.7 |
18.0 |
20.0 |
18.9 |
19.1 |
19.2 |
19.3 |
19.4 |
19.6 |
|
Grants |
1.9 |
1.6 |
1.8 |
1.3 |
1.3 |
1.3 |
1.3 |
1.2 |
1.2 |
|
Expenditure |
27.3 |
28.6 |
24.9 |
26.6 |
25.2 |
26.0 |
26.3 |
26.1 |
26.1 |
|
Expense |
18.5 |
19.6 |
17.2 |
15.9 |
17.1 |
17.6 |
17.6 |
17.5 |
17.5 |
|
Net acquisition of nonfinancial assets |
8.8 |
9.0 |
7.7 |
10.8 |
8.1 |
8.4 |
8.7 |
8.6 |
8.7 |
|
Net lending (+)/borrowing(-) |
-3.4 |
-7.1 |
-1.0 |
-3.6 |
-2.0 |
-2.7 |
-2.9 |
-2.6 |
-2.6 |
|
Net lending (+)/borrowing(-) excluding grants |
-5.3 |
-8.6 |
-2.7 |
-4.9 |
-3.3 |
-4.0 |
-4.2 |
-3.8 |
-3.8 |
|
Net acquisition of financial assets |
0.6 |
-4.0 |
2.5 |
-0.4 |
1.0 |
0.1 |
-0.4 |
0.1 |
0.5 |
|
Net incurrence of liabilities 2/ |
4.0 |
3.0 |
3.4 |
3.2 |
2.9 |
2.8 |
2.5 |
2.7 |
3.0 |
|
Total public debt (In percent of GDP) |
34.4 |
35.9 |
34.8 |
35.8 |
36.3 |
36.5 |
36.3 |
36.4 |
36.8 |
|
Balance of payments |
|||||||||
|
Exports, f.o.b. |
18,470 |
19,527 |
23,179 |
23,387 |
25,229 |
27,361 |
29,686 |
32,209 |
34,944 |
|
(Annual percent change) |
23.2 |
5.7 |
18.7 |
0.9 |
7.9 |
8.5 |
8.5 |
8.5 |
8.5 |
|
Imports, f.o.b. |
-20,993 |
-30,726 |
-32,005 |
-27,360 |
-30,760 |
-33,226 |
-36,004 |
-39,075 |
-42,468 |
|
(Annual percent change) |
-5.7 |
46.4 |
4.2 |
-14.5 |
12.4 |
8.0 |
8.4 |
8.5 |
8.7 |
|
Current account (including official transfers) |
-870 |
-11,179 |
-7,535 |
-647 |
-1,954 |
-2,141 |
-2,312 |
-2,521 |
-2,860 |
|
(In percent of GDP) |
-3.4 |
-42.0 |
-26.1 |
-2.1 |
-5.9 |
-6.0 |
-6.0 |
-6.1 |
-6.4 |
|
Gross official reserves 3/ |
21,334 |
21,119 |
17,805 |
20,869 |
23,348 |
25,881 |
28,534 |
31,478 |
34,583 |
|
(In months of prospective imports) |
7.8 |
7.3 |
7.1 |
7.4 |
7.7 |
7.8 |
8.0 |
8.1 |
8.2 |
|
External debt |
|||||||||
|
Public external debt |
8,810 |
9,505 |
9,971 |
10,926 |
11,805 |
12,727 |
13,627 |
14,701 |
15,937 |
|
(In percent of GDP) |
34.4 |
35.9 |
34.8 |
35.6 |
35.8 |
35.8 |
35.5 |
35.5 |
35.7 |
|
Public debt service |
365 |
397 |
427 |
413 |
430 |
446 |
461 |
482 |
503 |
|
(In percent of exports of goods and services) |
1.8 |
2.0 |
1.7 |
1.5 |
1.4 |
1.4 |
1.3 |
1.2 |
1.2 |
|
Memorandum items: |
|||||||||
|
Nominal GDP (in billions of Riels) |
105,892 |
110,506 |
121,030 |
131,086 |
142,221 |
155,128 |
169,582 |
184,812 |
201,549 |
|
(In millions of U.S. dollars) |
25,771 |
26,601 |
28,818 |
30,872 |
33,130 |
35,744 |
38,649 |
41,662 |
44,941 |
|
Sources: Cambodian authorities; and IMF staff estimates and projections. |
|||||||||
|
1/ Ratio of nominal GDP to the average stock of broad money. |
|||||||||
|
2/ Includes statistical discrepancy. |
|||||||||
|
3/ Includes unrestricted foreign currency deposits held at the National Bank of Cambodia. |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
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