October 2, 2018

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.

• Cambodia’s economic activity has been strong in 2018 and growth is expected to remain around 7 percent in the near term.
• Further measures are needed to address elevated financial sector vulnerabilities, including targeted measures in the real estate sector.
• Achieving sustainable and inclusive growth requires accelerating structural reforms to increase competitiveness, improve the business environment, and addressing governance vulnerabilities.

An International Monetary Fund (IMF) team led by Mr. Jarkko Turunen, visited Phnom Penh from September 19 to October 2, 2018, to conduct discussions on the 2018 Article IV consultation. ^[1] At the end of the visit, Mr. Turunen issued the following statement:

“Cambodia has made significant progress towards the Sustainable Development Goals due to years of impressive economic growth and reforms. Income growth has outpaced peers, poverty has declined, and the economy has begun to gradually diversify.

“Economic activity has been strong in 2018 and real GDP growth is projected to grow by 7¼ percent, owing to strong external demand and expansionary fiscal policies, while inflation remains low at around 2½ percent. Growth is projected to remain robust in the near term before moderating to its potential growth rate, estimated at around 6 percent, in the medium-term due to subdued productivity growth and maturing credit and real estate cycles. The current account deficit is projected to widen to about 10 percent of GDP in 2018, due to higher imports, including imports of construction materials. The foreign reserves are nevertheless expected to continue to grow, reaching US$9.6 billion (around 5 months of prospective imports) at end-2018.

“Cambodia’s economic outlook is positive, although there are downside risks. Our discussions focused on four areas:(i) managing macro-financial risks, (ii) safeguarding fiscal sustainability, (iii) supporting inclusive growth, and (iv) addressing governance vulnerabilities.

“Bank credit, increasingly concentrated in the real estate and construction sectors, is expected to grow around 20 percent in 2018 with lending by the MFI sector growing at an even higher rate. Concerns about credit quality, increasing concentration in the real estate sector and unregulated lending by real estate developers, reliance on external funding, and growing importance of microfinance institutions (MFI) continue to pose risks to financial and macroeconomic stability.

“To mitigate financial stability risks, the National Bank of Cambodia has taken several welcome macroprudential policy measures, including introduction of the capital conservation buffer, to be implemented in phases, introduction of a liquidity management framework, and improvements in banks’ loan classification and revisions to provisioning rules. Further efforts are needed. This includes effective implementation of past measures, further targeted prudential measures, such as raising risk weights for real-estate lending, introduction of a crisis management framework with a deposit insurance scheme, and continued upgrading in regulation and supervision, including for non-bank financial institutions. Promptly addressing shortcomings in the AML/CFT regime would reduce financial risks. Promoting further financial market development and reforms to encourage local currency use would help increase resilience over the medium-term.

“Fiscal performance in 2017 was considerable stronger than anticipated, with tax revenue growing by an impressive 26 percent. Fiscal stance in 2018 continues to be expansionary, reflecting expected increases in both current and capital expenditure. As a result, the fiscal deficit is projected to widen to about 2.2 percent of GDP. Following expansionary policies this year, the authorities’ preliminary plans for 2019 are geared towards fiscal consolidation.

“Going forward, absent tax policy reforms, revenue growth is expected to flatten as past revenue mobilization reforms mature and grants decline. Therefore, additional measures are needed to safeguard fiscal sustainability. Spending pressures should be contained, including to ensure that public wage increases are consistent with fiscal sustainability and are accompanied by further progress in public administration reforms. While ensuring spending efficiency, priority should be given to growth-enhancing infrastructure and development spending. On the revenue side, the authorities’ new Revenue Mobilization Strategy (2019-23) should aim to sustain revenue growth by reforming tax policies and revenue administration to improve their efficiency and equity.

“Financing additional infrastructure spending that is needed to address gaps through direct taxes, such as a higher real estate tax, would help boost growth while reducing income inequality.

“Public debt is low at just over 30 percent of GDP and Cambodia is expected to remain at low risk of debt stress. However, managing fiscal risks from contingent liabilities, including from increasing Public-Private Partnerships (PPPs), calls for limiting public guarantees and strengthening the institutional framework for PPPs.

“Building on significant past progress, fiscal governance can be strengthened through modernizing tax and customs administration, and public financial management and procurement reforms focused on increasing spending efficiency, improving transparency, and reducing opportunities for corruption.

“Cambodia faces structural constraints to potential growth. Strong near-term economic performance provides a window of opportunity for necessary structural and governance reforms, including higher health, education and infrastructure spending, that would help bring growth closer to the government’s target of 7 percent over the medium-term. Further policy efforts are needed to improve the business climate, increase competitiveness and encourage diversification through lower energy costs, better human capital and infrastructure, strengthen the rule of law, enhance the capacity of the state to efficiently provide public goods and services, and to improve governance.

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

The IMF team held constructive and candid 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, think tanks, and development partners. The team wishes to express its deep appreciation to the authorities and other stakeholders for frank and constructive discussions as well as their warm hospitality.