Cambodia’s economic growth is predicted to expand by 5.3 percent in 2023 and six percent in 2024, according to the International Monetary Fund (IMF) after concluding a mission in the country.

An IMF team, led by Davide Furceri, Deputy Division Chief of the Development Macroeconomic Division in the IMF Research Department, visited Cambodia from October 18 to 31 to hold discussions for the 2023 Article IV consultation.

During their visit, the team met with the National Bank of Cambodia, senior government officials and other public bodies to carry out the assessment of the country's economic health and to predict future financial problems.

At the end of the visit, Furceri said,

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“The Cambodian economy is steadily recovering from the pandemic but faces domestic and external challenges.”

After the visit, the IMF recommended that for Cambodia’s economy to reach its potential, structural reforms should focus on diversifying trade partners, investing in new growth drivers, and capitalizing on climate transition opportunities.

“The recent diversification of manufacturing into solar panels and electrical components is encouraging in this context,” Furceri noted in a press release, adding that enhancing public governance and transparency will be key to attract more foreign direct investment and ensure macroeconomic stability.

In 2022, growth accelerated to 5.2 percent from three percent in 2021, driven by strong manufacturing and a recovery in the services sector. The IMF predicted that in 2023, this will further grow by 5.3 percent and up to six percent next year.

“The ongoing recovery in tourism and surging exports of solar panels and electrical components are the main growth drivers,” Furceri added. “Garment exports remain weak, showing only modest signs of recovery in recent months, and slower construction activity is also weighing on growth.”

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He noted that after a period of decline from the peak in June 2022, inflation rebounded to 3.8 percent in September 2023. The IMF attributed this to higher food and fuel prices.

For the full year of 2023, inflation is expected to average at 2.3 percent and converge to its long-term trend of about three percent by 2024. However, this is in the absence of further commodity price shocks.

“The current account deficit narrowed in 2022 and is expected to gradually fall further, mainly due to the strong recovery in non-garment exports, tourism and remittance flows. International reserves are expected to remain stable,” Furceri said.

In addition, the fiscal deficit is expected to widen this year to 3.6 percent, mainly reflecting higher one-off spending needs.

In 2024, the deficit is projected to fall to two percent, and hit about 2.5 percent in the medium term, as temporary support measures for the pandemic and rising cost of living are removed, and revenues improve owing to tax and customs administration reforms.

Public debt to GDP is projected to increase moderately during the next decade and the risk of debt distress remains low, although there are vulnerabilities from shocks to exports and growth.

The IMF found that credit growth decelerated to 8.1 percent year-on-year in August 2023, down from 23.5 percent in 2021. However, the private credit-GDP ratio remains elevated for Cambodia’s level of development at about 160 percent.

Non-performing loans rose to 4.6 percent of total loans in August, reflecting a roll-back in forbearance measures and potentially rising stresses in parts of the economy.

“Uncertainty around the outlook is high and risks are to the downside, notably weaker-than-projected demand from advanced economies and China, tighter US monetary policy, geoeconomic fragmentation, and high levels of domestic private debt,” Furceri remarked.

He added that Cambodia’s fiscal position for 2023 is appropriately expansionary, given the current slack in the economy, low risk of public debt distress, declining inflation, and the limited transmission of monetary policy.

The IMF predicted that fiscal policy should turn neutral starting in 2024, if downside risks to the economy do not materialize and the fiscal deficit declines as growth strengthens.

In the medium term, it noted that the key fiscal challenge is to balance developmental objectives with fiscal sustainability, given Cambodia’s significant spending needs.

“In this regard, a fiscal rule that combines a medium-term anchor on the debt-to-GDP ratio and an operational ceiling on the overall fiscal deficit would strengthen the fiscal framework,” he said.

“The framework and implementation of public investment management should be continuously strengthened to improve investment efficiency. Establishing a government bond market is important for increasing the share of market-based and domestically financed government debt.”

In 2024, monetary and financial measures implemented during the pandemic should continue to be fully normalized to ensure a neutral stance as the output gap closes and inflation remains moderate.

“The authorities have been moving in this direction,” Furceri remarked. “Going forward, monetary policy decisions should continue to remain data-dependent and be flexible to adjust to output and inflation shocks.”

The IMF also looked at Cambodia’s ongoing modernization of the monetary and exchange policy framework, noting that this is crucial to enhance monetary transmission and support de-dollarization.

“The ultimate goal is to move from a de facto exchange rate targeting framework to a more direct targeting of inflation,” Furceri stated.

The mission also found that Cambodia’s banking sector is well capitalized and profitable. However, it noted that the recent deterioration in asset quality and the high level of private sector debt require “close monitoring”.

“In this context, the full phase out of loan forbearance and the issuance of several regulations strengthening capital adequacy and risk management are welcome,” Furceri recommended.

He added that efforts to strengthen the supervisory framework, including by transitioning to risk-based supervision and implementing Basel III, should continue, and data gathering and analysis capacity strengthened.

The IMF also commended Cambodia’s efforts to be removed from the Financial Action Task Force’s “gray list” by implementing an action plan to tackle money laundering and the financing of terrorism.

“We encourage the authorities to continue to strengthen the AML/CFT framework,” Furceri added.

The IMF also recommended that improving macroeconomic data would benefit monitoring of the economy and policy-making.

“The IMF will continue to provide technical assistance to help improve statistics, and in other areas of capacity development,” Furceri concluded.

On October 31, Aun Porn Moniroth, Deputy Prime Minister and Minister of Economy and Finance, chaired a meeting to review the results of the IMF assessment of the macroeconomic and public financial situation of Cambodia.

At the meeting, the Minister said that the government is strengthening fiscal policy by improving budget efficiency, continuing to improve revenue collection, and remaining vigilant about debt management.

According to the six-month assessment of the Ministry of Economy and Finance, the industrial sector is expected to grow five percent lower than expected.

Due to the slowdown in the growth of the garment sub-sector and the continued slow growth of the construction sub-sector, the non-garment manufacturing sub-sector continued to maintain good growth due to better expectations of external demand.

At the same time, production for the domestic market is on the rise, with the garment sector projected to grow by only four percent and the construction sector by 0.6 percent.

Hong Vannak, Economic Research at Royal Academy of Cambodia said since the end of 2022 until now, the number of garment goods exporting has decreased, while exports of non-garment manufacturing goods, such as bikes and electronic accessories, continue to increase.

“The huge issue of the Cambodian market as we know in Europe and USA, like the influence of the Russian and Ukraine war, has made all types of products’ price continue to increase,” Vannak said.

“Therefore, it creates unnecessary need, especially clothes that remain might be still being used. And as gas and foods become the priority products and shoes , clothes demand is dropping down.”

As a result, the government developed more car assembly plants and many other factories in Cambodia to replace the clothing manufacturing while the demand for clothes and footwear products are less prioritized now, he added.

Nith Kosal, a co-founder at Sethakech, agreed with the IMF findings, that even though the Cambodia economic rate is growing compared to the previous year, issues still occur and need to be addressed.

“As we can see the importance of economic activities are slowing down, such as investment in the tourism sector, construction sector and real estate are still stuck,” he said.

“What I worry about is how the developers will be able to refund the bank on time. If they borrow a lot of money from banks and don’t have enough money to repay the bank while their business doesn’t run well.”

Kosal noticed that in recent years, Cambodia has spent a lot on the public sector that contributes to GDP growth. Despite the rate of economic growth, in terms of generating income in the private sectors, they remain the same down low.

“So, the thing is that we should shift our focus on analysis between macro and micro economics in order to get to know the impact of the decreased problem of the foreign investment from China. Therefore, we can prepare strategies to be more resilient with the post-Covid 19 situation for better improvement of the economy,” he suggested.

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