DC: An International Monetary Fund (IMF) team led by Alasdair Scott held meetings with Cambodian authorities for the 2022 Article IV consultation  September 7-20, 2022. At the end of the mission, Scott said, “Cambodia’s economy is recovering, but faces new challenges.
“GDP growth rebounded in the second half of 2021, driven mainly by goods exports. But this year the economy has been shaken by developments in China, slowing consumer demand in advanced countries – the United States and Europe are important markets for Cambodian manufactured goods – and the tightening of global financial conditions (mainly via external demand, but also the funding costs of certain financial institutions). Inflation reached 7.8% year-on-year in June 2022, following significant increases in fuel and fertilizer costs, although it eased to 4.9% in August. Second-half export orders weakened and the real estate market slowed.
“Authorities have largely continued policy responses to the crisis, such as loans and guarantees, tax relief, wage subsidies and retraining, and cash transfers (while withdrawing some Covid-19 related spending as that the health situation improves). The National Bank of Cambodia (NBC) maintained reserve requirements and the level of capital conservation buffer, but ended forbearance on restructurings from July this year.
“Despite the new pressures, the recovery is expected to continue. Real GDP growth is expected to be 5% in 2022, following strong export performance earlier in the year, and close to 5½% in 2023, supported by the continued recovery in tourism and ongoing policy support , although mitigated by external pressures and the impact of higher prices on real disposal income. Inflation is expected to peak this year, be lower in 2023 and continue to decline thereafter, assuming it remains mostly confined to imported goods.
“Public finances should gradually improve. Spending pressures and weaker-than-expected tax revenues have resulted in a fiscal deficit of just over 7% of GDP in 2021. The deficit is expected to narrow to just over 4% of GDP in 2022 with a strong revenue rebound, widen somewhat in 2023, and decline further thereafter. The carrying capacity of public debt remains vulnerable to further shocks to exports and growth, but the risks of external and global debt distress remain low, as long as public debt is limited in the future and the increase in the private debt is not associated with an increase in contingent debt. liabilities of the sovereign.
“Uncertainty surrounding the outlook is particularly high and risks are tilted to the downside. The most pressing risks come from rising private debt; conditions in major major economies; and inflation.
“The level of private debt is very high, raising concerns about a slowing economy if borrowers struggle to meet repayments. Credit growth has exceeded nominal GDP growth for several consecutive years Consequently, outstanding credit to the private sector reached 170% of GDP at the end of 2021, a ratio significantly higher than that of other countries in the region.In addition, these figures do not take into account credits issued by lenders non-supervised loans (such as property developers and pawnbrokers), which could be significant Loans restructured in June 2022 are estimated at around 13% of GDP, and non-performing loans have already reached nearly 4½% of GDP.
“The BNC must continue to normalize prudential conditions to pre-pandemic parameters, so that the financial system is able to withstand future shocks. In May 2020, the BNC introduced a policy to facilitate the restructuring of loans; since December 2021, it has taken the welcome step of reintroducing the provisioning requirements. It should continue with enhanced monitoring, including rigorous on-site inspections. It should be ready to raise provisioning requirements and ask lenders facing solvency problems to proactively raise capital. The potential persistence of high debt levels highlights the importance of implementing frameworks for corporate insolvency, debt and bank restructuring, and deposit protection.
“To help curb credit growth, the BNC should complement these measures by gradually restoring monetary conditions to pre-crisis levels. Minimum reserve requirements for financial institutions should be increased, with the priority being to raise the minimum reserve ratio for foreign currency above that for local currency.
“Current fiscal plans appropriately balance some continued near-term stimulus, providing insurance against downside risks to aggregate demand, with steady deficit reductions over the medium term. However, given high inflation , large external imbalances, strong credit growth and weak monetary transmission, fiscal support should be well targeted.Social safety nets should continue to be used to protect the poor against the effects of inflation, but with some compensatory cuts elsewhere (in particular, the Covid-19 support measures are no longer necessary).
Fiscal support should be withdrawn if there are signs of second-round effects on domestic inflation; additional spending such that a net reduction in deficits would no longer be likely should be avoided. However, should downside risks materialize in the near term, the country currently has fiscal space to provide targeted support.
“Demands for public spending have increased during the pandemic and will likely increase further to meet existing infrastructure spending needs, increased demands for health care and education, and climate change adaptation.
Revenue mobilization (including rationalization of exemptions) and diversification are therefore paramount; simplifying the tax system would encourage compliance. A nominal debt anchor, combined with an overall deficit ceiling, would provide a credible framework, all the more important as Cambodia seeks to develop a sovereign debt market.
“The current account deficit has widened significantly and the external position is expected to remain significantly weaker than implied by medium-term fundamentals and desirable policies. Overall capital inflows have been stable, even though investment approvals are significantly down from previous years. Nevertheless, the exchange rate has remained stable. Foreign exchange reserves have decreased slightly in 2021, but are adequate, covering 8 months of planned imports.
“Structural measures are needed to boost productivity, not only to raise living standards but also to restore external balances in the long term, given the fixed nominal exchange rate. To this end, the authorities’ efforts, including the establishment of new free trade agreements and the introduction of a “one-stop shop” mechanism for domestic and foreign investors under the new investment law , are particularly appreciated.
“The investment environment will also be improved through continued governance efforts. The Anti-Corruption Institution has adopted its 2020-2025 action plan and implemented key actions, and all but one of the Financial Action Task Force’s demands have been met. However, some governance vulnerabilities and challenges remain – for example, whistleblower and transparency laws are still pending, and the digitization of the asset declaration system needs to be pursued. In addition, some investigative and surveillance agencies lack sufficient human and technological resources.
“Data issues complicate policy-making. Macroprudential tools would help smooth credit cycles, but data is needed on household financial burdens, such as debt service-to-income ratios. Substantially revised GDP data is expected to be released in early 2023. Gold import and export data has been extremely volatile, and much of the short-term financial inflows are unexplained, making it difficult to predict. external sustainability assessment. The IMF will continue to provide technical assistance to help improve data accuracy and in many other areas of capacity building.
The IMF team met with senior officials from the Royal Government of Cambodia, the National Bank of Cambodia, and other government agencies, as well as a wide range of stakeholders, including representatives from the commercial and bank, and development partners. IMF