Public Information Notice No. 13/01

Cambodia: IMF Executive Board Concludes 2012 Article IV Consultation

January 8, 2013

On December 3, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Cambodia.¹

Background

Despite the global slowdown, Cambodia’s economy has been holding up, driven by resilient exports and tourism, and a strong real estate recovery. Although moderating, exports continued to grow at double digit during the first three quarters of the year, in part thanks to improved access of garments exports to the European Union. Tourism has been particularly robust benefitting from new flight routes and construction activity is picking up owing to the real estate rebound. Real GDP growth is projected at 6½ percent in 2012, a slight moderation from last year. Headline inflation has decelerated and is expected to average 3–4 percent in 2012‒13 amid stable domestic food prices. Private sector credit continued to grow at more than 30 percent (year-on-year) during the first eight months on the back of broad-based credit demand and easy financial conditions.

The current account deficit (including official transfers) is projected to peak at 10 percent of GDP in 2012, reflecting moderating exports and temporarily higher imports related to large infrastructure projects, but the deficit remains fully financed by large foreign direct investment and official loans. Gross official reserves have continued their steady rise to US$3.4 billion in September, about four months of prospective imports.

Over the medium term, economic growth is projected to reach the potential of about 7½ percent, but this depends on improvements in the global economy and continued reforms to upgrade infrastructure, promote economic diversification, and enhance public sector revenue and service delivery. The current account deficit would narrow to 5½ percent of GDP, broadly in line with estimates of Cambodia’s savings-investment norm, driven by robust export growth, improved competitiveness and diversification, and lower imports after the completion of large projects.

This outlook is subject to considerable risks, stemming from the fragility of the global economy and domestic factors, including potential labor market instabilities and extreme weather. Spillovers from a deepening euro area crisis and severe global financial turbulence could be significant, but the impact has so far been relatively contained. Should any of these downside risks materialize, the policy space to cushion their impact would be limited. A high degree of dollarization constrains the effectiveness of monetary policy, leaving fiscal policy as the main tool to preserve macroeconomic stability. The slow pace of fiscal consolidation during the past two years means that the fiscal buffers are limited and the room for policy maneuver remains severely curtailed.

Executive Board Assessment

Executive Directors commended Cambodia’s resilient economic performance and the authorities’ prudent policies. They agreed that the outlook is favorable but stressed the importance of rebuilding policy buffers to guard against risks, including from external spillovers and high domestic credit growth. Over the medium term, further efforts are needed to diversify the economy and achieve stronger, broad-based growth.

Directors welcomed the recent improvements in revenue collection and the plan to begin replenishing government deposits in the 2013 budget. They emphasized that greater revenue mobilization is required to meet Cambodia’s large development needs and achieve long-term fiscal sustainability. They recommended an integrated approach of improving revenue administration, implementing fair and efficient tax policies, and strengthening governance.

More broadly, Directors encouraged continued efforts in strengthening public financial management. This will help improve public service delivery and ensure greater spending effectiveness and budget transparency. They also stressed the importance of strengthening the monitoring of contingent fiscal liabilities.

Directors noted that the high degree of dollarization limits the central bank’s control over monetary conditions. While the recent increase in the reserve requirement for foreign currency deposits is welcome, they considered that further gradual increases may be needed to guard against excessive risk-taking by banks. These could be complemented by appropriately designed macroprudential measures. Directors looked forward to the introduction of negotiable certificates of deposits to help develop an interbank market, which is key to more effective and market-based monetary policy operations.

Directors emphasized the need to continue to make progress in implementing key 2010 FSAP recommendations. They noted the authorities’ firm commitment to strengthening the central bank’s supervisory capacity and urged more decisive action in establishing an adequate and well-coordinated system of financial supervision. They looked forward to progress in adopting memoranda of understanding between supervisory agencies on information exchange and crisis resolution. They welcomed the authorities’ more prudent approach toward issuing new bank licenses.

Directors encouraged the authorities to continue their efforts to broaden the economic base and promote inclusive growth. They agreed that reducing infrastructure and skills bottlenecks, improving the investment climate, and promoting rural development remain important policy priorities.