Press Release No. 21/276

IMF Staff Completes 2021 Article IV Mission to Cambodia

September 28, 2021

• COVID-19 has hit the Cambodian economy with a significant decrease in external demand in 2020 and community spread of the virus in 2021.
• With extensive government support and a recovery in external demand, growth of around 2 percent this year and 5 percent next year is expected.
• Going forward, policy makers face the task of balancing near-term support with longer-term sustainability. As the economy recovers, support measures can become more targeted, while reforms can help to build a more resilient economy in the longer-term.

Washington, DC – September 27, 2021: An International Monetary Fund (IMF) team led by Alasdair Scott held virtual meetings with the Cambodia authorities on the 2021 Article IV consultation during September 13-27, 2021. At the end of the mission, Mr. Scott issued the following statement:

“COVID-19 has hit the Cambodian economy with a collapse in external demand in 2020 and community spread of the virus in 2021.

“The authorities have responded with measures to contain the spread of the virus and support livelihoods. The government rapidly redirected resources to healthcare while rationalizing other current spending. It implemented a system of cash transfers to vulnerable households. Loans and guarantees, tax breaks, wage subsidies, and support for retraining were extended to affected businesses. The National Bank of Cambodia (NBC) introduced measures early in the crisis to improve liquidity in the banking system, and issued guidance to banks to facilitate loan restructuring.

“Despite extensive government support, the economy has suffered. Growth is estimated to have contracted by 3.1 percent in 2020 after growth of nearly 7 percent in previous years. Although activity showed signs of picking up toward the end of 2020, the rapid spread of the virus from February this year has set the economy back again. As in many other countries, the crisis has strained the ability of households and firms to service loans.

“A slow recovery is projected. Staff projects growth of 2.2 percent in 2021, increasing gradually to pre-crisis rates of 6½ percent after a few years. Inflation is expected to remain contained. With non-food and energy inflation subdued, overall inflation is projected to continue around 3 percent.

“Tax revenues have suffered with the downturn and demands on healthcare and social assistance have increased this year. Fiscal deficits are expected to widen to nearly 6 percent in 2021 (in the Government Finance Statistics Manual 2014 format). Public debt in now 36 percent of GDP; with growth and appropriate policies, deficits are expected to shrink, containing debt to around 40 percent of GDP over the medium term.

“The current account deficit is expected to widen in 2021, to around one quarter of GDP. But financial inflows—mainly in the form of Foreign Direct Investment—are expected to remain strong, and FX reserves sufficient.

“Future growth depends heavily on the course of the pandemic. Faster containment of the virus in Cambodia and other countries will facilitate resumption of tourism; slower progress would damage growth further. These risks appear skewed to the downside at this stage. Risks from before the pandemic include the concentration of banking sector assets in real estate. Past droughts and floods have demonstrated the vulnerability to climate change.

“Looking ahead, policy makers face the task of balancing near-term support with longer-term sustainability. There is also the challenge to build a more resilient economy in the longer-term.

“Demands for public spending will likely remain high, not only on emergency measures but long-term development goals, such as investment in human capital, infrastructure, and climate adaptation. The government’s plans appropriately prioritize healthcare and social assistance. Continued restraint on other current spending and careful calibration of capital spending will ensure that financing needs can be met by existing government savings and existing external financing sources.

“Strong implementation of the authorities’ Revenue Mobilization Strategy will help to mitigate the damage to tax revenues. Tax and fee exemptions granted to support the economy should be explicitly time bound or contingent on economic recovery, to ensure that revenues bounce back with the recovery and that pressing spending needs are not starved for funding. They should also be costed so that policymakers can properly evaluate where support is best directed. Framing interventions within a well-defined medium-term fiscal framework—including a fiscal anchor, overall spending priorities, and financing strategy—would help to ensure confidence in the public finances over the medium term.

“Healthy banks are essential for a durable recovery. To that end, we commend the NBC for enhancing reporting requirements. This will assist the close monitoring of banks’ positions and can provide the necessary tools to implement a carefully calibrated sequence of steps to gradually return to standard prudential requirements.

“Continued reforms will help build a more resilient economy, by encouraging sectoral diversification, decreasing informality, reducing red tape, and increasing adaptability to climate change. The authorities’ plans to develop a domestic bond market will broaden financing options. The work of the Anti-Corruption Unit and Cambodia Financial Intelligence Unit (CAFIU) is crucial to improving the functioning of the economy and investor perceptions, and more rapid progress to apply the recommendations of the Financial Action Task Force will help with access to a broader range of foreign financing options. To strengthen financial safety net, it is indispensable to implement bank resolution legislation and a deposit protection scheme.

“The IMF stands ready to support the authorities’ reform efforts through policy advice and capacity development activities.”

The IMF team held discussions with senior officials of the Royal Government of Cambodia, National Bank of Cambodia, and other public agencies, as well as a wide range of stakeholders, including 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.