An International Monetary Fund (IMF) mission from Washington, D.C., headed by Sonali Jain-Chandra, visited Cambodia from July 6 to July 20, 2016 to conduct the annual Article IV staff discussions 1, 2. During the visit, the mission assessed macroeconomic developments and held policy discussions with ministers and senior officials of the Royal Government of Cambodia, and met a wide range of stakeholders, including representatives of business community, NGOs, and development partners.
At the conclusion of the visit, the mission issued the following statement:
"Cambodia is a fast-growing, highly open economy, and just attained lower-middle-income status. In 2015, economic activity remained strong, while inflation rose moderately. Growth is projected to remain robust around 7 percent for 2016-17, supported by strong garments exports, real estate and construction activity as well as the reduction in oil prices. Over the medium term, growth is projected to slow to around 6� percent (by 2021) due to a gradual reduction in FDI, challenges in export diversification, and a moderation in the credit cycle. Inflation is projected to rise to 3.2 percent by end-2016 due to a pickup in food prices. The current account deficit (CAD) is projected to narrow in 2016 to 9.7 percent of GDP, from 10.7 percent in 2015, due to robust garments exports and reduced imports following the completion of major hydro projects. FDI and official sector flows are expected to continue financing most of the CAD over the medium-term.
"The main downside risk to the outlook arises from rapid credit growth, increasingly concentrated in real estate, which threatens to undermine economic and financial stability. External risks include a significant slowdown in China, an appreciating U.S. dollar, weaker growth in Europe and increased uncertainty from the Brexit referendum result, and a sharper-than-anticipated tightening in global financial conditions.
"The key policy challenges are to secure sustained growth and mitigate growing financial sector vulnerabilities, along with continuing efforts to meet the sustainable development goals and promote inclusion. Discussions focused on four areas: (i) containing growing macro-financial risks, (ii) maintaining fiscal sustainability, (iii) boosting competitiveness and diversification, and (iv) expediting financial market development.
"Private sector credit growth averaged nearly 30 percent (year-on-year) over the past three years and the credit-to-GDP ratio doubled to 62 percent by end-2015, higher than the median Emerging Markets' level and about twice the median Low Income Countries' level. In addition, there is growing concentration of credit in the real estate, mortgage and construction sectors. To mitigate rising financial stability risks, the NBC recently introduced a Basel-III-compliant Liquidity Coverage Ratio and higher minimum capital requirement regulations for financial institutions, which are welcome developments. The mission recommended further measures to reduce macro-financial risks and achieve a soft landing of the credit cycle using a well-coordinated and sequenced set of micro- and macro-prudential policy tools, developing a crisis management framework, and upgrading financial regulation and supervision, including of non-bank financial institutions.
"The fiscal deficit is projected to widen to 2.6 percent of GDP this year (still well below the budget target), from 1.6 percent of GDP in 2015, as rising current expenditure more than offsets gains from revenue mobilization efforts. Strong revenue performance is expected to continue as the result of welcome improvements in tax administration. Current expenditure is projected to rise by about 1.2 percent of GDP, driven by an increase in the wage bill. Amid rising wage pressures, the mission recommended maintaining fiscal sustainability and supporting development by further boosting revenues (continuing to modernize revenue administration and tax policy), and to improve the structure of expenditure more towards productive pro-development and well targeted social spending. The mission also recommended maintaining an appropriate level of government deposits as necessary buffers to withstand economic shocks.
"Over the last two decades, Cambodia grew rapidly, its integration with the global economy increased sharply and poverty has fallen significantly. Going forward, Cambodia's strategic location, China's changing trade patterns, and ongoing regional integration provide further opportunities to build on this success. Important steps have been taken by the government that will help Cambodia capitalize on these opportunities. Nonetheless, further measures are needed to boost productivity, increase competitiveness, and ensure that the benefits of growth are widely shared. Our discussions covered a range of policies to overcome structural growth barriers and vulnerabilities, including a narrow economic base, weak business climate, high dollarization, and underdeveloped financial markets. These structural features constrain Cambodia's growth potential and render the economy and financial system vulnerable to shocks. Priorities include reducing energy costs and improving reliability, enhancing transportation links, addressing skills gaps via improving the quality of education and promoting technical and vocational training, as envisioned in the Industrial Development Policy launched by the government in 2015. Efforts should also be expedited further to develop and deepen financial markets, to boost investment efficiency and facilitate macro-economic management."
1 Under the Article IV consultation, IMF staff undertakes 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 took place in July 2015.
2 Mr. Markus Rodlauer, Deputy Director of the Asia Pacific Department of the IMF, joined the mission during the second week.
Source: IMF Communications Department