Press Release No. 15/317

Press Release: IMF Concludes 2015 Article IV Consultation Mission to Cambodia

July 3, 2015

An International Monetary Fund (IMF) team led by Ms. Sonali Jain-Chandra visited Phnom Penh during June 22–July 3, 2015 to conduct discussions for the 2015 Article IV consultation¹ with Cambodia. The team assessed macroeconomic developments and held policy discussions with ministers and senior officials of the Royal Government of Cambodia, and met a large group of stakeholders, including representatives of the academic and business community, civil society, and development partners.

At the conclusion of the visit, Ms. Jain-Chandra issued the following statement:

“Economic activity remains strong driven by construction, real estate and garments exports. GDP growth is estimated at 7 percent in 2014 and is expected to stay at the same level this year. After declining in early 2015 due to the sharp oil price decline, inflation is expected to rise moderately to 2.6 percent by end-2015. The current account deficit remains largely financed by foreign direct investment (FDI) and official loans, and is projected to moderate over the medium term, supported by export growth and the completion of large power projects. Gross official reserves stood at US$4.4 billion in December 2014, nearly 4 months of prospective imports.

“The macroeconomic situation and outlook are thus favorable, although there are downside risks. A protracted growth slowdown in Europe or a stronger dollar would constrain garments exports. Weaker-than-expected growth in China would have spillovers through the FDI, banking, and tourism channels. On the domestic front, rapid credit growth, particularly to the buoyant real estate and construction sector, intensifies financial stability risks. Any erosion of competitiveness could adversely affect exports and investment.

“Against this backdrop, discussions focused on how best to continue Cambodia’s successful development by safeguarding macro-financial stability, securing fiscal buffers, and promoting competitiveness, diversification and inclusive growth.

“Rapid financial deepening in Cambodia requires careful macro-financial risk management to ensure financial stability. In this regard, the recent expansion of reserve requirements to cover foreign borrowing and the enhanced focus on liquidity risk management are steps in the right direction. Continued development of negotiable certificates of deposits (NCD) markets launched by the National Bank of Cambodia and formalization foreign exchange markets would support market-based monetary policy operations, better liquidity management, and the promotion of local currency.

“Moderating credit growth to a more sustainable level would require additional tightening of monetary policy and strengthening regulation and supervision. While stronger enforcement of micro-prudential regulations and continued strengthening of supervisory capacity can moderate the build-up of credits risks, well-designed macro-prudential policies could play an important supportive role. Given the growing systemic importance of micro-finance institutions, regulatory and supervisory upgrades are warranted. The buoyant real estate market also needs close monitoring and further strengthening of regulatory frameworks to ensure that the sector can support growth without compromising financial stability.

“Strong revenue performance supported by the Revenue Mobilization Strategy (RMS) and solid growth have eased immediate fiscal pressures and improved fiscal buffers by replenishing government deposits. The fiscal deficit narrowed (including grants) to 1.3 percent of GDP in 2014, primarily driven by stronger revenues. Going forward, institutionalizing the RMS reforms to sustainably increase revenues would be important to secure fiscal sustainability. Also, further wage increases should be contingent on projected fiscal performance (such as meeting revenue targets and maintaining an adequate fiscal buffer). Continued focus on upgrading the quality of public services by deeper and efficiency-enhancing civil service reform and by linking budget to policy through the Public Financial Management reform programs is needed to better support the momentum of fiscal consolidation over the medium term. Although debt remains sustainable with a low risk of distress, closer monitoring of fiscal risks from contingent liabilities and further strengthening of capacity to analyze these risks would help safeguard the fiscal space.

“The ongoing regional transformation offers a unique opportunity for Cambodia to diversity its production base and move up the value chain. Improving competitiveness and human capital would make growth more sustainable and inclusive. To take better advantage of regional opportunities and Cambodia’s own demographic dividend, continued improvement in skills and vocational training, energy and logistics, and the business climate is critical.”

¹ Under the Article IV consultation, IMF staff undertake annual surveillance and analysis of economic developments and policies of member countries for discussion by the Executive Board. The last Article IV consultation discussion with Cambodia was concluded in November 2013.