The International Monetary Fund (IMF) expects the Cambodian economy to stage a gradual recovery from the Covid pandemic to achieve pre-crisis growth of around 6.5 percent in the medium term.

In its annual assessment of Cambodia released in Washington on Thursday, the IMF said external demand was being fueled by buoyant recoveries in the United States, China and Europe.

“Assuming tourism resumes but takes some time to recover to pre-crisis levels, near-term growth mostly depends on manufacturing and other services,” it said.

But “over-supply in commercial and residential properties is likely to see growth in construction and real estate remain subdued, compared to pre-crisis years.”

After shrinking by an estimated 3.1 percent last year, the IMF said GDP growth is expected to be a bit more than 2.0 percent this year before rising to around 6.5 percent, supported by transfers to households and robust capital spending.

In 2022, the country’s current account deficit — measuring trade in goods and services along with certain financial transactions like grants — is forecast to narrow as external demand recovers.

The main improvements are expected to be from tourist services supported by benefits from bilateral free-trade agreements with China and Korea for light manufacturing and agriculture.

“Financial inflows – mainly in the form of foreign direct investment — are expected to continue to be strong over the medium term,” the IMF said.

Downside risks are seen in three areas — the still raging global pandemic, “potentially inadequate provisioning and weak capital buffers” in bank loan portfolios along with recent droughts and floods.

The IMF said Cambodian authorities shared its outlook. Their growth projections “differed only marginally, with slightly higher growth expected in 2021 and slightly lower growth for 2022,” the report said.

As of the financial system’s exposure to Covid-related distress, it is still “profitable and well capitalised” and loan restructuring policies have “supported the economy and avoided widespread bankruptcies.

“Nonetheless, the authorities agreed that the build-up of restructured loans was a concern requiring heightened vigilance,” the IMF said.

Cambodian authorities also agreed that banks fully recognising loan losses would be an “important first step toward a gradual and calibrated normalisation of prudential requirements” — depending on the results of stress tests and additional data reported by banks.

In the area of structural reforms, the IMF said the recovery’s quality would be affected by several long-standing challenges — notably a lack of diversification and low value added in exports.

Other challenges include high labor informality and perceptions of governance weaknesses and corruption, and emerging vulnerabilities from climate change.

“Trade and investment liberalisation has helped Cambodia to move from dependence on agriculture toward light manufacturing,” the report said.

“However, so far this has been limited mainly to relatively low-skill value-added activities. Diversifying and raising value added requires continued progress on ‘horizontal’ policies to boost fundamentals such as institutions, education, and technological readiness.”

The IMF also noted that Cambodia had “one of the highest rates of informality in the region” with informal employment accounting for more than 90 percent of the workforce — similar to levels in Laos and Nepal and compared with less than 80 percent in Vietnam.

“Informal firms are usually much less productive than formal firms,” it said. “Informality also reduces the tax base, and informal workers are not covered by social-protection measures such as pension systems and health insurance. The authorities have pursued a policy of tax breaks to encourage firms to formally register. These measures could be bolstered with information campaigns and simplification of registration.”

As for corruption, the IMF said efforts to diversify and move up value chains were likely to be “undermined” without progress to reduce “informal customs charges” and other costs.

“In addition, extensive corruption reduces the net benefits workers and firms see from paying taxes as part of the formal economy,” it said.

The report suggested boosting the effectiveness of the Anti-Corruption Unit by “increasing its operational independence and transparency and stepping up investigations through better use of financial intelligence.”

At the same time, “legal reforms to introduce due diligence measures for business relationships with domestic politically exposed persons would help detect cases of corruption.”

As for Cambodia’s debt levels, the IMF said its debt sustainability analysis “indicates that Cambodia remains at low risk of external and overall debt distress.”

Source: Agency Kampuchea Press

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