IMF Executive Board Concludes 2022 Article IV Consultation with Cambodia

December 18, 2022

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Cambodia.

Cambodian GDP growth rebounded in the second half of 2021, driven mainly by exports of goods. But this year the economy has been buffeted by developments in China, the slowdown in consumer demand in advanced countries—the US and Europe are significant markets for Cambodian manufactures—and tighter global financial conditions (mainly via external demand, but also funding costs for some financial institutions). Inflation surged, following significant increases in fuel and fertilizer costs, export orders for the second half of the year have weakened, and the real estate market is slowing.

Despite the new pressures, the recovery is projected to continue. Real GDP growth is forecast to be 5 percent in 2022, after the strong export performance earlier in the year, and nearly 5½ percent in 2023, supported by the continued recovery of tourism and ongoing policy support, although dampened by external pressures and the impact of rising prices on real disposal income. Inflation is expected to peak this year, be lower in 2023, and decline further thereafter, assuming it remains mostly confined to imported goods.

Uncertainty around the outlook is particularly high, and risks are tilted to the downside. The most pressing risks are from rising private debt; conditions in key large economies; and inflation.

The public finances are expected to gradually improve. Spending pressures and lower-than-expected tax revenue resulted in a fiscal deficit of just over 7 percent of GDP in 2021. The deficit is expected to narrow to just over 4 percent of GDP in 2022 with a strong bounce-back in revenues, widen somewhat in 2023, and decrease further thereafter. Public debt-carrying capacity remains vulnerable to further shocks to exports and growth, but risks of external and overall debt distress remain low, so long as public debt is constrained in the future and the increase in private debt is not associated with an increase in contingent liabilities of the sovereign.

Executive Board Assessment [2]

Executive Directors welcomed Cambodia’s strong economic recovery from the pandemic supported by the country’s strong economic buffers and robust crisis response. Directors agreed that the growth outlook is broadly favorable, notwithstanding downside risks from slower external demand and rising domestic vulnerabilities including elevated levels of private debt. In that context, they encouraged the authorities to calibrate fiscal policy to help support vulnerable households, without compromising price stability, while also taking steps to address financial sector risks and corruption vulnerabilities.

Directors encouraged the National Bank of Cambodia to rein in credit growth by gradually restoring monetary conditions to pre-crisis levels. They saw merit in normalizing prudential conditions to pre-pandemic settings with heightened supervision and readiness to raise provisioning requirements. Directors also underscored the importance of implementing corporate insolvency, debt and bank restructuring, and deposit protection frameworks.

Directors supported the authorities’ current fiscal plans to provide insurance against downside risks to aggregate demand while maintaining steady reduction in fiscal deficits over the medium term. However, given wide external imbalances and strong credit growth, they emphasized that fiscal support should be well targeted. Social protection measures should continue to be used to protect the poor against the effects of inflation, coupled with offsetting cuts elsewhere.

Directors noted the importance of policy frameworks to ensure resilience over the longer term. They encouraged efforts to enhance spending efficiency and strengthen revenue mobilization, including by broadening the tax base and rationalizing exemptions. A debt anchor in nominal terms, combined with an overall deficit ceiling, would provide a credible framework, particularly as Cambodia seeks to develop a market for sovereign debt. The recent issuance of the first domestic government bond is a welcome development.

Directors underscored the importance of complementary structural policies to support strong, inclusive growth. They welcomed the progress made in implementing anti-corruption action plans and encouraged continued efforts to strengthen governance frameworks more broadly. Directors also emphasized the need for structural measures to boost productivity to help raise living standards and to durably restore external balances, given the pegged nominal exchange rate. They also underscored the importance of improving data quality through capacity development and encouraged the authorities to build on recent efforts to strengthen climate adaptation and mitigation.

It is expected that the next Article IV consultation with Cambodia will be held on the standard 12-month cycle.

[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] 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. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .

Table 1. Cambodia: Selected Economic Indicators, 2019–23

Per capita GDP (2021, US$) : 1,648

Life expectancy (2019, years) : 75.5

Population (2021, million) : 16.3

Literacy rate (2019, percent) : 87.7

2019

2020

2021

2022

2023

Est.

Proj.

Output and prices (annual percent change)

GDP in constant prices

7.1

-3.1

3.0

5.0

5.4

Inflation (end-year)

3.1

2.9

3.7

5.8

3.5

(Annual average)

1.9

2.9

2.9

5.8

3.5

Saving and investment balance (in percent of GDP)

Gross national saving

9.2

16.4

-22.0

-5.0

10.9

Government saving

8.4

3.4

0.4

3.1

4.1

Private saving

0.8

13.0

-22.3

-8.1

6.9

Gross fixed investment

24.2

24.9

25.5

25.0

25.0

Government investment

7.4

8.8

9.0

8.9

9.0

Private investment

16.8

16.1

16.5

16.1

16.0

Money and credit (annual percent change, unless otherwise indicated)

Broad money

18.2

15.3

16.3

18.5

12.6

Private sector credit

28.0

17.2

23.4

18.0

15.0

Velocity of money 1/

0.9

0.8

0.7

0.6

0.6

Public finance (in percent of GDP)

Revenue

26.8

23.9

21.6

22.1

22.0

Domestic revenue

24.8

22.0

20.0

21.4

21.1

Of which : Tax revenue

21.7

19.7

18.0

19.4

19.1

Grants

2.0

1.9

1.6

0.7

0.8

Expenditure

23.8

27.3

28.6

26.1

26.9

Expense

16.4

18.6

19.6

17.3

17.9

Net acquisition of nonfinancial assets

7.4

8.8

9.0

8.9

9.0

Net lending (+)/borrowing(-)

3.0

-3.4

-7.1

-4.1

-5.0

Net lending (+)/borrowing(-) excluding grants

1.0

-5.3

-8.6

-4.8

-5.8

Net acquisition of financial assets

8.8

0.6

-4.0

-1.1

-1.7

Net incurrence of liabilities 2/

5.8

4.0

3.0

3.0

3.3

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

Exports, f.o.b.

14,998

18,470

19,469

22,062

24,061

(Annual percent change)

15.6

23.2

5.4

13.3

9.1

Imports, f.o.b.

-22,251

-20,993

-30,726

-29,340

-28,220

(Annual percent change)

18.3

-5.7

46.4

-4.5

-3.8

Current account (including official transfers)

-4,067

-2,182

-12,624

-8,587

-4,318

(In percent of GDP)

-15.0

-8.5

-47.5

-30.0

-14.1

Gross official reserves 3/

18,763

21,334

20,941

20,747

22,304

(In months of prospective imports)

9.8

7.8

7.8

8.0

8.1

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

Public external debt

7,596

8,810

9,493

10,284

11,086

(In percent of GDP)

28.2

34.4

35.9

36.1

36.3

Public debt service

309

360

384

408

426

(In percent of exports of goods and services)

1.5

1.8

1.9

1.7

1.6

Memorandum items:

Nominal GDP (in billions of Riels)

110,014

105,892

110,506

120,315

130,477

(In millions of U.S. dollars)

27,087

25,771

26,601

28,647

30,729

Exchange rate (Riels per dollar; period average)

4,062

4,109

4,154

..

..

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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