IMF Executive Board Concludes 2011 Article IV Consultation with Cambodia

Public Information Notice (PIN) No. 12/19
February 27, 2012

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2011 Article IV Consultation with Cambodia is also available.

On February 3, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Cambodia on a lapse of time basis. Under the IMF’s lapse of time procedures, the Executive Board completes Article IV consultations without convening formal discussions.


The economy has performed well in 2011, but recent floods add to uncertainty. Buoyant garments exports, increasing tourist arrivals, and a gradually-improving real estate sector have supported a broadening recovery. Agriculture was also strong in the first three quarters—rice exports through September tripled under the new rice policy—but recent severe floods are expected to exert a transient setback. Staff estimates overall GDP growth at 5¾ percent, but nonagricultural growth is forecast to exceed 7½ percent, the highest in four years. Assuming agriculture will return to pre-flood trends, overall GDP growth is forecast to reach 6½ percent in 2012.

Inflationary pressures increased in 2011, driven by higher food and fuel prices and reinforced by strong credit growth estimated to exceed 30 percent (y/y). Headline inflation is expected to average 5¾ percent in 2011 and to ease only gradually in 2012, in part reflecting a moderation in global commodity prices.

The current account deficit (including official transfers) is projected at about 9½ percent of GDP in 2011–12, reflecting a higher petroleum import bill and strong imports related to large hydropower projects. However, the current account deficit remains fully financed through broadening foreign direct investment and official loans. Gross official reserves rose to US$3 billion in October, equivalent to about 4¼ months of prospective imports. In the absence of signs of pressures on external competitiveness, the riel has remained close to its post-2008 average in real effective terms and is broadly in line with fundamentals.

Economic growth is expected to return to its potential of about 7½ percent in the medium term, provided reforms to improve the business climate and upgrade physical infrastructure, and enhance public sector revenue and service delivery are steadfastly implemented. Cambodia’s current account deficit would gradually fall to about 5 percent of GDP by 2016, in line with estimates of its savings-investment norm, on the back of robust export growth, reflecting further diversification and improved competitiveness, and lower imports of petroleum and construction materials with the completion of hydropower projects.

The fragility of the global recovery exposes Cambodia’s narrow export base to significant downside risks. Cambodia is highly sensitive to economic activity in the U.S. and Europe, which account for about two thirds of its total exports and the bulk of high-end tourist arrivals. Any immediate financial spillovers, however, would likely be limited and mostly indirect. A high degree of dollarization constrains the effectiveness of monetary policy in cushioning such shocks, leaving fiscal policy as the main tool for safeguarding macroeconomic stability. However, a largely reduced fiscal space from the previous crisis and the need to preserve financial stability limit the scope to cushion such shocks. On the other hand, upside potential could stem from better-than-expected returns on investments in the power sector and rural infrastructure areas, against the backdrop of positive spillovers from Asia’s economic rebalancing.

Executive Board Assessment

In concluding the 2011 Article IV consultation with Cambodia, Executive Directors endorsed staff‘s appraisal, as follows:

Cambodia’s economy has performed well in 2011 and recent severe floods constitute only a temporary setback to building stronger foundations for growth. Buoyant garment exports, a strong tourism sector, and an emerging recovery of the battered real estate sector mean that nonagricultural GDP growth likely reached the highest rate in four years. However, depending on replanting efforts and the impact on rice yields, the damage of floods to agriculture could visibly dent overall growth. On the back of strong economic activity, higher global food and fuel prices, and reinforced by strong credit growth, inflation rose through most of 2011 and is expected to ease only gradually. The real effective exchange rate appears to remain broadly in line with economic fundamentals.

Growth dynamics point to a favorable outlook for 2012, in part boosted by the return of agriculture to pre-flood trends. However, Cambodia’s narrow economic base means that exposure to global downside risks is high while policy buffers are limited, mainly owing to the high degree of dollarization and largely reduced fiscal space after the 2009 global recession. Medium-term growth prospects critically depend on ongoing reforms to improve the business environment and upgrade physical infrastructure, and enhance public sector revenue and service delivery to provide for Cambodia’s vast development needs while safeguarding fiscal sustainability.

With significantly less fiscal space to counter a potential severe global downturn than in 2009, any fiscal contingency plan would need to focus on accelerating and reprioritizing spending for existing high-impact social sector and infrastructure investment projects. The 2012 budget will help rebuild fiscal space by halving domestic financing, but further revenue mobilization over the medium term is key to strengthening policy buffers, and providing adequate resources for development. Better monitoring of sizable and growing contingent liabilities will be critical to safeguard fiscal space, while steadfast implementation of ongoing public financial management reforms will help to ensure spending effectiveness.

Keeping reserve requirements, the National Bank of Cambodia (NBC)’s main policy tool, at post-crisis lows is inconsistent with Cambodia’s strong recovery and could undermine perceptions about the authorities’ commitment to price stability. With credit growth accelerating, inaction could also contribute to macro-financial risks. There is scope, however, to recalibrate the pace and timing of monetary normalization in the event of an adverse global economic shock. Better liquidity monitoring and the creation of an interbank market are not only important steps to improve monetary operations consistent with Cambodia’s longer-term development strategy, but would also help increase financial system resilience at the current juncture.

The main challenge ahead is building a deeper financial system while safeguarding financial stability. Amid a rapidly growing banking system, a moratorium on bank licenses would provide a critical window to build adequate supervisory capacity and improve the balance between the degree of competition and health of banks. Formalizing coordinated supervision and crisis management between relevant government agencies is essential to reduce systemic risks and limit potential fiscal costs. Upgrading Cambodia’s shallow foreign exchange market will need to be carefully sequenced with Cambodia’s international financial integration, the growth of the stock market, and the development of the overall monetary policy framework.

The authorities’ medium-term structural policies appropriately focus on infrastructure bottlenecks and improving the investment climate, which would also help alleviate rural-urban imbalances. Further strengthening the Antil-Money Laundering/Counter-Financing of Terrorism (AML/CFT) framework and better and more timely economic statistics will also help improve Cambodia’s competitiveness by reducing the cost of doing business and facilitating informed decision making.

Cambodia: Selected Economic Indicators, 2008–12
  2008 2009 2010 2011 2012
      Est. Proj.

GDP in constant prices (annual percent change)

6.7 0.1 6.0 5.8 6.5

(Excluding agriculture)

7.0 -1.8 6.7 7.6 6.2

Inflation (end-year)

12.5 5.3 3.1 6.1 4.1

(Annual average)

25.0 -0.7 4.0 5.6 4.3

Saving and investment balance (in percent of GDP)


Gross national saving

15.0 12.5 14.4 13.5 13.9

Gross fixed investment

19.5 16.0 18.5 23.0 24.0

Money and credit (annual percent change)


Broad money

4.8 36.8 20.0 23.0

Private sector credit

55.0 6.5 26.6 33.0

Public finance (in percent of GDP)



15.9 15.8 17.0 15.6 15.6


15.7 20.0 20.0 18.4 18.7

Net lending (+)/borrowing(-)

0.2 -4.2 -3.0 -2.8 -3.0

Balance of payments (in millions of dollars, unless otherwise indicated)

Exports, f.o.b.

3,493 2,996 3,884 4,803 5,251

Imports, f.o.b. 1/

-5,076 -4,484 -5,515 -6,919 -7,463

Current account (including official transfers)

-468 -360 -458 -1,216 -1,428

(In percent of GDP)

-4.5 -3.5 -4.1 -9.5 -10.1

Gross official reserves 2/

2,164 2,367 2,653 3,080 3,449

(In months of prospective imports)

4.8 4.4 4.0 4.3 4.4

External debt (in millions of dollars, unless otherwise indicated)

Public external debt 3/

2,776 2,946 3,206 3,611 3,992

(In percent of GDP)

27.0 28.5 27.6 28.1 28.1

Memorandum items:


Nominal GDP (in billions of riels)

41,968 43,108 47,102 51,867 57,370

(In millions of U.S. dollars)

10,352 10,414 11,255

Exchange rate (riels per dollar; period average)

4,054 4,139 4,185

Sources: Cambodian authorities; and IMF staff estimates and projections.

1/ From 2011, includes imports related to public-private power sector projects.

2/ Excludes unrestricted foreign currency deposits held as reserves at the National Bank of Cambodia; starting in 2009,

includes the new SDR allocations made by the IMF of SDR 68.4 million.

3/ Debt owed to the Russian Federation is valued at 0.6 rubles per U.S. dollar with the standard 70 percent discount.

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. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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