Cambodia Investment Review
The International Monetary Fund has forecast Cambodia’s real GDP growth to be 5 percent in 2022, after the strong export performance earlier in the year, and nearly 5.5% 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 disposable income.
According the to financial agency’s 2022 annual executive summary, for Cambodia while inflation is expected to peak this year, it should 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, it added.
Fiscal deficit expected to narrow
Cambodia’s 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 Directors from the IMF 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.
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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.
They also 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.
IMF supports current fiscal plans
IMF directors supported the authorities’ current fiscal plans to provide insurance against downside risks to aggregate demand while maintaining a steady reduction in fiscal deficits over the medium term.
However, given wide external imbalances and strong credit growth, they emphasized that financial 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.
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They also 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.
Need for structural change to boost productivity
The IMF has 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.
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IMF works to achieve sustainable growth and prosperity for all of its 190 member countries. It does so by supporting economic policies that promote financial stability and monetary cooperation, which are essential to increase productivity, job creation, and economic well-being. Cambodia officially joined the IMF on December 31, 1969.