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

IMF Statement at the Conclusion of the 2007 Article IV Discussions
with Cambodia
Press Release No. 07/128
June 12, 2007
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.

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