IMF says rapid spread of coronavirus from February this year set economy back
An International Monetary Fund (IMF) team led by Alasdair Scott held virtual meetings with Cambodian authorities on the 2021 Article IV consultation from September 13 to 27, 2021. At the end of the mission, Mr. Scott made the following statement:
“COVID-19 has hit the Cambodian economy with a collapse in external demand in 2020 and community spread of the virus in 2021.
“Authorities have responded with measures to contain the spread of the virus and support livelihoods. The government quickly redirected resources to health while rationalizing other current spending. It has set up a system of cash transfers to vulnerable households. Loans and guarantees, tax breaks, wage subsidies and support for retraining have been extended to the companies concerned. The National Bank of Cambodia (NBC) took steps at the onset of the crisis to improve the liquidity of the banking system and issued guidelines to banks to facilitate loan restructuring.
“Despite strong government support, the economy suffered. Growth is estimated to contract by 3.1% in 2020 after growing nearly 7% in previous years. Although activity showed signs of recovery towards the end of 2020, the rapid spread of the virus from February of this year caused the economy to shrink. As in many other countries, the crisis has strained the ability of households and businesses to service loans.
“A slow recovery is expected. Staff are forecasting 2.2% growth in 2021, gradually increasing to pre-crisis rates of 6½% after a few years. Inflation is expected to remain contained. With non-food and fuel inflation contained, headline inflation should remain around 3%.
“Tax revenues have suffered from the slowdown and demands for health care and social assistance have increased this year. Budget deficits are expected to widen to nearly 6% in 2021 (in the format of the 2014 Government Finance Statistics Manual). Public debt now represents 36% of GDP; with growth and the right policies, deficits are expected to narrow and contain debt to around 40% of GDP over the medium term.
“The current account deficit is expected to widen in 2021, reaching around a quarter of GDP. But financial inflows, mainly in the form of foreign direct investment, are expected to remain strong and foreign exchange reserves sufficient.
“Future growth is highly dependent on how the pandemic evolves. More rapid containment of the virus in Cambodia and other countries will facilitate the resumption of tourism; slower progress would hurt growth more. These risks appear to be on the downside at this stage. Pre-pandemic risks include the concentration of banking sector assets in real estate. Past droughts and floods have demonstrated vulnerability to climate change.
“For the future, policymakers face the task of balancing short-term support with longer-term sustainability. There is also the challenge of building a more resilient economy in the long run.
“Public expenditure demands are likely to remain high, not only for emergency measures, but also for long-term development goals, such as investment in human capital, infrastructure and climate adaptation. Government plans give appropriate priority to health care and social assistance. Continued limitation of other current spending and careful calibration of capital spending will ensure that financing needs can be met from existing public savings and existing external sources of finance.
“Strong implementation of the authorities’ revenue mobilization strategy will help mitigate the damage to tax revenues. Tax and fee exemptions granted to support the economy should be explicitly time bound or contingent on economic recovery, to ensure that incomes rebound with the recovery and that urgent spending needs are not deprived of. funding. They should also be costed so that policy makers can properly assess where support is best directed. Framing interventions within a well-defined medium-term budgetary framework, including a budgetary anchor, overall spending priorities and a financing strategy, would help ensure confidence in public finances over the medium term.
“Healthy banks are essential for a sustainable recovery. To this end, we commend the CNB for improving the reporting requirements. This will facilitate the close monitoring of bank positions and may provide the necessary tools to implement a carefully calibrated sequence of steps to gradually return to standard prudential requirements.
“Continued reforms will help build a more resilient economy, by encouraging sector diversification, reducing informality, reducing red tape and increasing adaptability to climate change. The authorities’ plans to develop a domestic bond market will broaden financing options. The work of the Cambodia Anti-Corruption and Financial Intelligence Unit (CAFIU) is crucial to improving the functioning of the economy and investor perceptions, and faster progress in implementing the recommendations of the Action Group. financial support will help access a wider range of overseas financing options. To strengthen the financial safety net, it is essential to implement bank resolution legislation and a deposit protection system.
“The IMF stands ready to support the authorities’ reform efforts through policy advice and capacity building activities.
The IMF team met with senior officials from the Royal Government of Cambodia, the National Bank of Cambodia and other government agencies, as well as a wide range of stakeholders, including representatives from the business and commercial sectors. banking and development partners. The team would like to express its deep gratitude to the authorities and other stakeholders for the open and constructive discussions.