IMF Statement at the Conclusion of the 2007 Article IV Discussions with Cambodia

The following statement was issued in Phnom Penh on June 5, 2007 by John Nelmes, International Monetary Fund (IMF) Resident Representative in Cambodia:

"An IMF mission, led by Jeremy Carter, Adviser in the IMF's Asia and Pacific Department visited Cambodia during May 22 - June 5, 2007 to conduct the Article IV consultation¹. During the visit, the mission took stock of recent economic and financial developments, and held policy discussions with Prime Minister Hun Sen and Senior Ministers and officials of the Royal Government of Cambodia (RGC) on their macroeconomic and structural policies. The mission also met representatives from the National Assembly and the Senate, Cambodia's development partners, business community, research think-tanks, labor unions, and non-governmental organizations.

"Prudent macroeconomic policy implementation has provided stability, in turn boosting investors' and consumers' confidence, and has underpinned very strong macroeconomic performance: impressive rates of growth have been sustained, inflation remains low, external debt is sustainable, and headway is being made in a number of important structural reforms. The mission noted that the environment provides ideal conditions to re-energize reforms in areas where progress has been less rapid, and to address the key constraints to broader poverty reduction.

"Following estimated 2006 growth of 10¾ percent, real GDP is expected to increase by around 9 percent in 2007, driven by an expansion of agricultural production and continued robust activity in tourism, garment exports, and construction. Services, in particular finance and telecommunications, are increasingly contributing. These broad trends are projected to continue in the near term, and with continued high levels of foreign direct investment, should result in growth of around 7½ to 8 percent in 2008. Risks to the outlook include competitive pressures in the garment sector resulting from Vietnam's WTO accession, the lifting of safeguards on China's garment sector at end-2008, and possible adverse weather conditions that could affect agriculture.

"Inflation ticked up to around 4 percent recently, mainly reflecting rising fish prices and a pass-through of higher international oil prices. Assuming broadly stable international oil prices for the rest of the year, inflation should remain in the low single digits, though the mission and the authorities agreed on the need to be vigilant for signs of underlying demand pressures on inflation should they arise.

"The external current account deficit (excluding official transfers) narrowed to 7¼ percent of GDP in 2006. A slight further improvement in 2007 is projected as a result of strong growth in garment exports and tourism. The riel has remained broadly stable in bilateral and effective terms, and gross international reserves rose to $1.2 billion at end-April 2007.

"Revenue performance in 2006 was strong due to vibrant economic activity and improved administration supported by the Public Financial Management (PFM) reform program. Strong performance continued in 2007 and budgeted revenue targets are expected to be exceeded by large margins. Government expenditure has been slow, due in part to initial difficulties in implementing new spending procedures. The mission urged that these difficulties be resolved quickly, and agreed that delayed expenditure should be accelerated to ensure budget expenditure targets are fully met. On this basis, the overall government deficit is projected at 3¼ percent of GDP in 2007, financed by concessional foreign funds.

"Fiscal policy discussions centered on improving the level and quality of revenue and expenditure, to achieve the development and poverty-reduction goals set out in the National Strategic Development Plan (NSDP). Further sustained revenue increases could be achieved with continued improvements in administration and enforcement, though further consideration should be given to policy measures, including property taxation and a widening of the VAT base. The mission supported the government's policy of steadily raising public sector wages as revenue increases allow, and welcomed commitments to increase productive capital investments, including expediting the implementation of poverty reducing projects funded with the US$82 million received under the IMF's Multilateral Debt Relief Initiative (MDRI).

"The PFM reform program has achieved good progress, including the introduction of new government treasury accounts and budgetary classification to better monitor poverty reducing expenditures. The mission looked forward to implementation of plans to improve cash management and government banking arrangements.

"Oil production could significantly increase national income in the long term, and associated fiscal revenues would provide vital financing for development spending. Given the substantial uncertainty still surrounding the level of reserves and the timing of production, the mission cautioned against undertaking any large oil infrastructure projects, and noted that large commercial borrowing ahead of uncertain oil revenues would be imprudent. The mission encouraged the Government to make early progress on developing the institutional and legislative underpinnings for petroleum taxation and revenue management, including adopting the Extractive Industries Transparency Initiative (EITI).

"The banking sector continues to expand very rapidly, with deposits and lending rising on the order of 40 percent. Growth in the banking system is facilitating economic development, and reflects rising confidence. The fast pace of growth requires strong banking supervision to ensure that banks are weighing all of the lending risks properly.

"Finally, the mission welcomed the authorities' commitment to the ambitious WTO-related trade facilitation reform agenda. Accelerating progress is important, particularly on key elements of the legal framework and in reforming customs valuation."

¹ Under the Article IV consultation, IMF staff conduct surveillance and analysis of economic developments and policies of member countries for discussion by the Executive Board. The last Article IV consultation with Cambodia was undertaken in 2006.