95982 MAINTAINING HIGH GROWTH C AMBODIA E CONOMIC U PDATE A PRIL 2015 @ All rights reserved This Cambodia Economic Update is a product of the World Bank. The findings, interpretations, and conclusions expressed in the update are those of World Bank staff, and do not necessarily reflect the views of its management, Executive Board, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. Preface and Acknowledgements The Cambodia Economic Update (CEU) is a product of the staff of the World Bank. It was prepared by Sodeth Ly and Enrique Aldaz-Carroll, Macroeconomics and Fiscal Management Global Practice (MFM GP), Cambodia Country Office, the World Bank. Linna Ky served as research assistant. The team worked under the guidance of Mathew A. Verghis, Practice Manager, MFM GP. Carolina Mejia-Mantilla, Poverty GP, contributed the poverty section. The team is grateful for the comments, advice and guidance provided by Ulrich Zachau, Country Director, Alassane Sow, Country Manager, and Shabih Ali Mohib, Program Leader. The CEU is produced bi-annually to provide up-to-date information on macroeconomic developments in Cambodia. It is published and distributed widely to the Cambodian authorities, the development partner community, the private sector, think tanks, civil society organizations, non-government organizations, and academia. The update is timed to coincide with the six-monthly publication of the East Asia Economic Update by the East Asia MFM GP of the World Bank. We received valuable comments and suggestions from Nikola L. Spatafora, East Asia and Pacific Chief Economist Unit, Ralph van Doorn, MFM GP, and Ratchada Anantavrasilpa, Finance and Markets GP. The report also benefited from the advice, comments, and views of various stakeholders in the Royal Government of Cambodia (RGC), the private sector, development partner institutions and academia. The team is very grateful for their time and inputs. We are very grateful to the Cambodian authorities, in particular the Ministry of Economy and Finance, and the National Bank of Cambodia for their cooperation and support in the preparation of the CEU. The Cambodia Communications Team, comprising Saroeun Bou and Sophinith Sam Oeun prepared the media release, web display, and dissemination. For information about the World Bank and its activities in Cambodia, please visit our website at www.worldbank.org/cambodia. To be included in the email distribution list of the CEU and related publications, please contact Linna Ky (lky@worldbank.org). For questions on the content of this publication, please contact Saroeun Bou (sbou@worldbank.org). Contents Executive Summary ....................................................................................................................................... i Recent Economic Developments .................................................................................................................. 1 1. Real sector ............................................................................................................................................. 1 a) Garments ........................................................................................................................................... 3 b) Construction and real estate .............................................................................................................. 3 c) Tourism ............................................................................................................................................. 4 d) Agriculture ........................................................................................................................................ 4 2. External sector....................................................................................................................................... 5 a) Exports .............................................................................................................................................. 5 b) Imports .............................................................................................................................................. 6 3. Inflation ................................................................................................................................................. 7 4. Monetary sector..................................................................................................................................... 7 a) Monetary aggregates, interest rates, and exchange rates .................................................................. 7 b) The banking sector ............................................................................................................................ 9 5. Fiscal sector......................................................................................................................................... 10 a) Revenue composition ...................................................................................................................... 10 b) Expenditure composition ................................................................................................................ 11 c) Fiscal balance .................................................................................................................................. 11 d) 2015 Budget .................................................................................................................................... 13 6. Poverty reduction ................................................................................................................................ 14 Key messages and recommendations ......................................................................................................... 16 Selected Issue –Dollarization Issue: Advantages, Disadvantages and Ways Forward ............................... 18 1. Motivation ........................................................................................................................................... 18 2. Brief background................................................................................................................................. 18 3. Advantages .......................................................................................................................................... 18 4. Disadvantages ..................................................................................................................................... 19 5. Ways forward ...................................................................................................................................... 21 Cambodia: Key Indicators .......................................................................................................................... 23 Executive Summary driven by crop production mainly of paddy rice until the past few years, has recently eased due primarily to depressed agricultural commodity prices and slow yield improvements. Cambodia continues to enjoy robust growth, albeit at a slightly slower pace. Real growth in The external position remains stable, 2014 is estimated to have reached 7.0 percent. The garment supported by healthy foreign direct sector, together with construction and services, in particular investment inflows, underpinning the overall finance and real estate, continues to propel growth. macroeconomic stability. Due to decelerated However, there are signs of weaknesses in garment and exports, the current account deficit (excluding agricultural production that are slightly slowing growth. official transfers) is, however, estimated to have Overall macroeconomic management remains appropriate. slightly widened to 11.2 percent of GDP in 2014, Fiscal consolidation continues with further improvements in financed primarily by foreign direct investment revenue collection resulting from enhanced administration. concentrated in the tourism, garment and Poverty continues to fall in Cambodia (poverty headcount construction sectors. Gross international reserves rate in 2012 was 17.7 percent) although the pace of poverty reached a record high of US$4.6 billion, or about reduction has declined significantly. Cambodia’s real growth 4 months of prospective imports, at the end of rate is expected to moderate to 6.9 percent in 2015 and 2014. 2016, as it confronts stronger competition in garment exports, continued weak agriculture sector growth, and Exchange rate targeting continues to support softer growth in the tourism sector. price stability. The targeting together with dollarization, however, is eroding the Recent developments competitiveness of exports to the EU market.1 As the US dollar has strengthened, so the Cambodian The garment sector continues to be one of riel (CR) has followed suit, only depreciating Cambodia’s main engines of growth. While slightly against the US dollar, with the riel versus continuing to grow, the garment sector has the US dollar exchange rate reaching CR 4,075 at recently faced increased competition, arising from the end of 2014, compared with CR 3,995 at the the continued appreciation of the US dollar, end of 2013. The riel, however, has appreciated by emergence of other low-wage regional 17 percent against the Euro since July 2014. competitors, in particular Myanmar, and the enduring impact of past labor market unrest on Inflation has eased significantly with garment orders. Garment exports eased to a year- continuing depressed food prices and the on-year growth rate of 9.2 percent in value terms recent decline in oil prices. Inflation dropped to and 11.2 percent in volume terms in 2014, 1.2 percent year-on-year at the end of 2014, compared with 17.6 percent and 13.4 percent in compared with 4.6 percent at the end of 2013. In 2013, respectively. The construction sector the consumer price index basket, year-on-year remains resilient, supported by the return of price indices of key non-food sub-components business confidence with the restoration of such as housing, utilities, and transportation domestic political stability. Tourist arrival growth retreated into negative territory, while the index of softened with a year-on-year arrival growth rate of the food sub-component eased further. Regional only 6.9 percent in 2014, compared with 17.5 and other developing-country inflation remains percent in 2013. Cambodia’s pro-poor agriculture benign. sector, which had experienced exceptional growth 1 Exchange targeting requires the National Bank of Cambodia (NBC) to NBC injects (withdraws) riels by buying (selling) US dollars to maintain a buy (or sell) US dollar to maintain Cambodian riel (CR) versus US dollar riel versus dollar exchange rate of about CR 4,000. As a result, gross exchange rate pegged. As capital (US dollar) inflows increase (decrease), the international reserves increase (decrease). Cambodia Economic Update April 2015 >> i fiscal buffer against shocks. Cambodia’s debt Financial deepening continues, supporting distress rating, as assessed by the joint World economic expansion as deposit and credit Bank/IMF debt sustainability analysis (DSA) growth accelerated quickly in 2014. Private conducted in 2013, remains low. Public debt to sector deposits reached US$8.81 billion, or a 30.6 GDP ratio is estimated to have reached 33.9 percent year-on-year increase, at the end of 2014, percent by the end of 2014. compared with US$6.88 billion, or a 14.2 percent year-on-year increase, at the end of 2013. Driven Overall, growth has been pro-poor in the largely by foreign currency deposits after the recent past. Poverty has continued to fall. As of return of confidence in the banking system and the 2012, the poverty headcount rate (according to the overall economy, broad money growth doubled, national poverty line) was 17.7 percent, almost 3 reaching 29.8 percent year-on-year by the end of percentage points lower than in 2011.2 Growth 2014, compared with only 14.6 percent at the end disproportionately benefited households with of 2013. As a result, dollarization increased still lower incomes. Consumption in the bottom 40 further, with the share of foreign currency percent of the consumption distribution grew at deposits in broad money rising to 82.6 percent by an average annual rate of 7 percent during 2007- the end of 2014, up from 82.2 percent at the end 12, compared with a 3.6 percent rate for of 2013. Partly fueled by the construction boom, consumption of the total population. This was credit growth, which decelerated during the first mainly the result of a dynamic agriculture sector. half of 2014, once again picked up in the second Inequality has declined significantly, with the Gini half, reaching 31.3 percent year-on-year at the end coefficient falling from 32 in 2008 to 28 in 2012. of 2014 with an outstanding credit amount of Nonetheless, progress in reducing poverty and US$8.89 billion. As a result, the loan-to-deposit inequality has slowed in the past few years. ratio rose to 87.2 percent at the end of 2014, up from 82.2 percent in mid-2014, but down from the Outlook 90 percent seen at the end of 2013. The outlook for growth remains favorable with the return of confidence. The sharp decline Fiscal consolidation continues, with in oil prices will help to contain production costs improved collection providing additional and improve the country’s current account finances for rising public sector wages and position. Cambodia is projected to gain about 0.5 priority spending without undermining percent in additional GDP this year from the oil macroeconomic stability. Thanks to the public price decline. GDP growth is projected to slightly financial management reform program, domestic moderate to 6.9 percent in 2015 due to softer revenue collection has accelerated further and is growth of the key economic engines. Although estimated to have reached 16.1 percent of GDP in vibrant activity in the construction sector is 2014, compared with 15.1 percent collected in expected to continue, signs of weakness in the 2013. Expenditure remains contained, budgeted at garment and agriculture sectors are likely to 20.5 percent of GDP. The overall fiscal deficit remain. Increased costs, US dollar appreciation, (including grants), however, has only slightly and new competitors, will likely continue to affect improved and reached 2.5 percent of GDP garment export growth. Due to dampened because of a dwindling grants component, agricultural commodity prices in the international compared with 2.7 percent of GDP in 2013. market and continued slow crop yield Government deposits, therefore, rose to US$1.1 improvements, agriculture sector growth will likely billion at the end of 2014, compared with US$700 be modest. million at the end of 2013, providing an increased 2 The national poverty line for 2012 is CR 4,654.7 (nominal terms). Cambodia Economic Update April 2015 >> ii There are downside risks to forecast growth. incorporation of additional power supply from These include on the domestic side, potential hydro and coal-fired power plants, making renewed labor unrest. On the external front, risks efficiency improvements, and fostering include a delay in economic recovery in Europe, transparency in solicitation in power distribution and the reentry of Thailand and Myanmar into the and supply provision would also be positive. international rice export market, together with the expected lower rice import demand coming from Given land area constraints, rice production the Philippines and Indonesia, and potential growth—which had been driven largely by regional political uncertainty. cultivated area expansion—will depend more on increases in rice yield and quality. Successes In the next few years, rural poverty is likely to in revitalizing pro-poor agriculture growth will decline at a slower rate than in the past. In rural likely be obtained mostly in the medium-term due areas, further poverty reduction will be made more largely to continued dampened agriculture challenging due to slow crop yield improvement commodity prices, while the supply response may and reduced international agricultural commodity also take time. First, reducing logistics costs (with prices. the establishment of a Logistics Task Force for Inter-ministerial Coordination) and doing It is likely that inequality will not decrease in business costs (to help address the main reasons the near future. The projected sources of for Cambodian rice losing the competitiveness it economic growth in the short and medium term, has at farm gate prices) can be done in a relatively mainly the construction, garment and tourism short time with a strong commitment. Second, sectors, are unlikely to favor the poor further improvements are needed in access to disproportionately. finance for rice producers and millers to increase milling volumes and reduce milling costs, which Emerging Challenges and Recommendations will require short- to medium-term response The key challenge will be to stimulate the times. Finally, increasing public investment in agriculture, garment, and tourism sectors to agricultural advisory services, seed development boost economic growth and reduce poverty and irrigation infrastructure to enhance shock further. resilience, and the opening up of new markets will have high impact but will be relatively time Revitalizing garment sector growth in consuming and resource intensive. Detailed particular, as well as growth in the recommendations can be found in the manufacturing sector more generally, will be forthcoming World Bank study “Agriculture in instrumental in maintaining high growth and Transition”. macroeconomic stability. This can be achieved in the short- to medium-term timeframe. First, to To improve tourism sector growth, efforts further strengthen and diversify exports, it will be could be made to increase the time and money vital to maintain stability in the labor market to spent by tourists in Cambodia. This could be benefit from relocation of industry from China. done by improving road transportation (linking Second, it will be important to improve the borders, Siem Reap, key coastal areas and Phnom business environment through the simplification Penh), together with greater investment and and automation of business registration and trade coordination of efforts between central and local facilitation processes, and the development of an governments, the private sector, and local enhanced investment law (see World Bank communities. Such efforts would all help to Investment Climate Assessment 2014). Finally, promote the diversification of tourist destinations from a medium-term perspective, addressing the beyond the Angkor Archeological Park. high cost of electricity by speeding up the Promotion of regional tourist destinations and travel arrangements would also help capture a Cambodia Economic Update April 2015 >> iii larger share of the world tourism market which is retirement funds are steps in the right direction. growing. However, a better understanding of the coping mechanisms available for vulnerable households Safeguarding stability in the rapidly and their effectiveness would help to mitigate the expanding financial sector will help to ensure risk of them falling back into poverty. sustainable economic growth. Enhanced banking supervision in the nascent but rapidly Further broadening of the tax base and expanding financial sector will help to prevent strengthening of tax administration will help bubbles developing in the construction and real to improve collection, which is required to estate sectors, while also strengthening the finance much needed development spending. country's resilience to possible higher volatility in Meanwhile, the rapidly rising wage bill will international financial markets. With strong inter- need close monitoring. Increased public ministerial coordination and commitment, investment to strengthen the agriculture and successes in this area can be obtained over the tourism sectors, as well as to support overall short term as the technical and managerial capacity structural reforms discussed earlier, requires of the monetary and economic authorities has enhanced efficiency in public spending and been improved after years of continuing additional financial resources. It will therefore be successful performance. important to continue improving domestic revenue collection by further broadening the tax Cambodia will greatly benefit from further base and strengthening tax administration. improved investments and spending Improvements in revenue collection continue to efficiency in health, education and social be made almost continuously, and therefore, it is protection, translating into significant import to keep up the efforts to further improve productivity and welfare gains in both the administration and good governance. While the short and long run. Although the country has rising wage bill clearly helps to improve the living seen major improvements in terms of coverage, conditions of poorly paid civil servants, wage rises low education attainment and malnutrition are alone will not be sufficient to improve service more prevalent among the poor population. delivery. It will therefore be important to closely Despite Cambodia’s remarkable progress in link pay increases with improved human resource poverty reduction, most households that have management and performance outcomes. escaped poverty have done so only by a small Furthermore, wage increases will require close margin and remain ‘near-poor’, leaving them monitoring in order to ensure that they remain highly vulnerable. Recent initiatives with the affordable. introduction and funding of health equity and Cambodia Economic Update April 2015 >> iv Recent Economic Developments moderate to 6.9 percent in 2015 due to softer growth of some key economic engines. Although vibrant activity in the construction sector is expected to continue and the tourism sector is 1. Real sector likely to partially recover, this may still be insufficient to offset the decelerating garment and 1. Cambodia continues to enjoy robust agriculture sectors, resulting in slightly moderated growth, albeit at a slightly slower pace. Real growth. Increased production costs, US dollar growth in 2014 is estimated to have reached 7.0 appreciation and new competitors, will continue percent (Figure 1). Garment exports continue to to affect garment export growth. Agriculture be one of Cambodia’s main engines of growth. sector growth will likely continue to be modest, While continuing to grow and attract additional affected by dampened agricultural commodity investments, the garment sector is confronting prices in the international market and slow crop several challenges, including the continued yield improvements. appreciation of the US dollar, the emergence of other low wage regional competitors, in particular 3. There are downside risks to forecast Myanmar,3 and the enduring impact of past labor growth. These include on the domestic side, market unrest on garment orders. Garment potential renewed labor unrest. On the external exports eased to a year-on-year growth rate of 9.2 front, the risks are a delay in economic recovery in percent in value terms and 11.2 percent in volume Europe, and the reentry of Thailand and Myanmar terms in 2014, compared with 17.6 percent and into the international rice export market, together 13.4 percent in 2013, respectively. The with the expected lower rice import demand construction sector remains resilient, supported by coming from the Philippines and Indonesia, and the return of business confidence with the potential regional political uncertainty. restoration of domestic political stability. Cambodia’s tourist arrivals decelerated with a Figure 1 While growth remains robust, signs of a year-on-year arrival growth rate of only 6.9 percent deceleration are emerging. Contribution to real growth (In percent) in 2014, compared with 17.5 percent in 2013. The Agriculture Industry Services agriculture sector, which experienced exceptional Others Real GDP growth 7.3 7.4 growth, driven by crop production, mainly of 8 6.7 7.1 7.0 6.9 8 6.0 paddy rice until the last few years, has recently 6 6 eased due primarily to depressed agriculture 4 4 commodity prices and slow yield improvements. 2 2 2. The outlook for growth remains 0 0.1 0 favorable with the return of confidence. The -2 -2 sharp decline in oil prices will help contain -4 -4 production costs, increase consumers’ disposable 2008 2009 2010 2011 2012 2013 2014e 2015/p income, and improve the country’s current e= estimate; p = projection Source: Cambodian authorities and Bank staff estimates and projections account position. Cambodia is projected to gain about 0.5 percent of GDP4 this year from the oil price decline. The country is also expected to graduate to lower-middle income status, see Box 1. However, GDP growth is projected to slightly 3Based on an analysis of garment exports and production in the first half brought in about US$1.2 billion in 2013 and just over US$900 million in of 2014, Myanmar is currently on track to export US$1.7 billion in garment 2012. products over the course of 2014. This represents a near doubling of 4 East Asia and Pacific Economic Update, the World Bank, April 2015. garment product export revenue in just two years. Garment exports Cambodia Economic Update April 2015 >> 1 Box 1 Cambodia is on track to become a lower-middle income economy by 2015 The World Bank classifies economies based on their Gross National Income (GNI) per capita. GNI is the total value of goods and services produced within a country (i.e., its GDP) plus the income received from other countries (notably from repatriation of profits and wages) less similar payments made to other countries earned in the domestic economy. For example, if a Cambodian company operating in a foreign country sends some of its profits back to Cambodia, this increases Cambodia’s GNI increases. GNI is considered to be the best single indicator of economic capacity and progress, although it is recognized that GNI does not, by itself, measure welfare or success in development. GNI per capita is thus the World Bank's main criterion for classifying countries into income groups. For the period July 1, 2014 to June 30, 2015, the World Bank has established a set of income group thresholds (Table B1.1). Low-income economies are those with a GNI per capita (calculated using the Atlas Method) of US$1,045 or less in 2013; lower-middle-income economies are those with a GNI per capita of more than US$1,045 but less than US$4,125; upper-middle-income economies are those with a GNI per capita of more than US$4,125 but less than US$12,746; and high-income economies are those with a GNI per capita of US$12,746 or more. The per capita income thresholds are updated the first of July every year to incorporate the effect of international inflation. Table B1.1 Gross National Income per capita thresholds for income group classification as of July 2014 (in constant US$ of 2013): Low income < $1,045 $1,045 < Lower middle income < $4,125 $4,125 < upper middle income < $12,746 $12,746 < high income Source: http://data.worldbank.org/news/2015-country-classifications?print Note: The thresholds are updated every July. For the latest thresholds see http://data.worldbank.org/about/country-and-lending-groups As the thresholds remain constant over time in real terms, growth simulations need to be performed in constant 2013 US dollars. To assess the income grouping that Cambodia could belong to in the future, its economic growth is projected in constant 2013 US dollars and the resulting GNI per capita is compared with the thresholds presented in Table B3.1. Cambodia’s economy is likely to reach lower-middle income status in 2015, and this would be officially recorded in July 2016. At the forecast GDP growth in constant terms of 6.9 percent in 2015, and annual population growth of 1.2 percent, Cambodia will likely reach a GNI per capita of US$1,096 (measured in constant 2013 US$) in 2015, which exceeds the US$1,045 threshold (Tables B1.1 and B1.2). As the World Bank updates income grouping membership in July, Cambodia’s lower-middle income status would likely be officially recorded in July 2016. Table B1.2 Simulation of dates and growth rates at which Cambodia would change its development status GDP growth in constant US$ GNI per capita in constant US dollars of 2013 2014 2015 2030 2050 4.9% 1,035 1,075 1,908 4,101 6.9% 1,035 1,096 2,589 8,148 9% 1,035 1,117 3,544 16,521 Source: World Bank staff calculations based on WDI, Atlas, and MEF data. Note: Estimation is based on a Gross National Income of $950 in 2013. Forecasted GDP growth is taken as a proxy for GNI growth. Annual population growth is assumed to be 1% per annum from 2015 onwards. At the baseline growth scenario of 6.9 percent annual real GDP growth, Cambodia would reach upper-middle income status by 2039. Reaching high-income status by 2050 would require a real GDP growth rate of 9 percent (Table B1.2), which is equivalent to an 8 percent per capita income growth rate. Judging from countries’ past growth experiences since 1950, maintaining such growth rate would require an extraordinary effort. The fastest growing countries over two decades reached average annual per capita income growth rates of 8.9 percent (China) and 6.1 percent (Armenia). However, attaining upper-middle income status before 2050 is well within reach if GDP growth exceeds the low case scenario of 4.9 percent. Under the baseline of 6.9 percent GDP growth, Cambodia would reach it already by 2039. See http://data.worldbank.org/indicator/NY.GNP.PCAP.CD and http://www.investordictionary.com/definition/gross-national-income Cambodia Economic Update April 2015 >> 2 a) Garments Figure 2 Garment export value continues to grow but at a slower pace. Some destination diversification achieved. (In US$ million) 4. The value of garment exports continues to grow but at a slower pace, while there has also been diversification in export destinations (Figure 2). The sector continues to attract additional investments although the labor unrest that the sector experienced in the past has been perceived as increased uncertainty in fulfilling orders, leading to a number of major brands diversifying their orders with other low wage competitors. In addition, there are some export destination diversification successes. In Source: Cambodian authorities 2014, of the total US$5.5 billion garment exports, US$1.4 billion or 26 percent was destined for markets outside the US and the EU, compared b) Construction and real estate with only 8.2 percent in 2005. The largest market 5. The construction sector remains share outside the EU and the US is Japan, which resilient, supported by the return of business accounts for 6 percent. The share of garment confidence with the restoration of domestic exports to ASEAN remains low at just 1.3 percent. political stability. Construction sector activity The strategy of exporting high-end garment remains vibrant, with real estate prices continuing products to the EU to benefit from the EU’s to rise by up to 20 percent a year. Approved Everything-But-Arms (EBA) preferential construction permits in 2014 reached US$3.2 treatment continues, although it faces stiffer price billion (Figure 3) or 17.5 percent higher than those competition due to the Euro’s depreciation against issued in 2013.5 Half of the approved amount is the US dollar. Cambodian export prices, as well as for provincial construction projects. The value of input costs, are denominated in US dollars due to real estate and tourism (fixed assets) projects dollarization. In value terms, the share of garment approved by the Council for the Development of exports to the EU has grown to 40 percent of total Cambodia (CDC) continues to grow, reaching garment export value, while that of the US has US$1.5 billion, or an 11 percent year-on-year shrunk further to 34 percent since 2014. In increase, in 2014. However, occupancy is failing to volume terms, the share of garment exports to the keep up with the rapid pace of construction US has declined but remains the highest, at 44 expansion. The expansion of the construction and percent of total garment export volume, while the services sectors against a backdrop of moderated EU share has risen to 36 percent. real sector (tourism, garment, and agriculture) growth presents potential risks. Key risks associated with the continued expansion include: (i) the intrinsic cyclicality of the construction and real estate sectors; (ii) the high FDI share makes the sector vulnerable if FDI recedes; (iii) speculative bubbles; and (iv) typical challenges facing land policy (transparent land management, resettlement management, etc.), which affect poverty efforts and shared prosperity. International experience shows that construction- 5Change in investment approvals needs to be read with caution as they are very sensitive to any recent approval of a large project. Cambodia Economic Update April 2015 >> 3 driven growth is volatile and less equitable, which China continued to capture the first- and second- suggests the desirability of guarding against an largest shares, accounting for 20.1 percent and unsustainable construction boom. 12.4 percent of the total arrivals, respectively. Arrivals from the Republic of Korea (South Figure 3 Continued expansion of the construction Korea) eased and was overtaken by those from section in 2014. Construction approval permits (YTD, in US$ Lao PDR which contributed 10.2 percent of the million) total arrivals.7 Arrivals from Japan continued to grow but at a slower pace although Japanese investors’ confidence in Cambodia remains upbeat.8 Table 1 In 2014, tourist arrivals to Cambodia and Vietnam decelerated while Thailand’s arrival growth was negative. Source: Cambodian authorities c) Tourism 6. The tourism sector has experienced a d) Agriculture slowdown. Cambodia’s total tourist arrivals decelerated with total arrivals of 4.5 million, or a 8. Cambodia’s pro-poor agriculture year-on-year arrival growth rate of only 6.9 percent sector, which had experienced exceptional in 2014, compared with total arrivals of 4.2 growth driven by crop production mainly of million, or a year-on-year arrival growth rate of paddy rice until the past few years, has 17.5 percent, in 2013, due largely to slower growth recently eased due primarily to depressed of arrivals from the two largest markets, Vietnam agriculture commodity prices and slow yield and China. Decelerated arrivals by land (40 improvements. Agriculture growth remains percent of which was contributed by the Vietnam weak, as expansion of cultivated areas and yields, market), which account for about half of total particularly in the case of rice, has slowed. In 2014, arrivals, explain the moderated overall arrivals the wet season rice harvested area increased number, while a double-digit growth rate remains compared with that of 2013, although the for arrivals by air (Table 1). Vietnam also cultivated area decreased slightly. Rice production experienced a sharp slowdown and Thailand faced and yield of the wet season, however, declined by negative growth in tourist arrivals in contrast to 2.5 percent and 3 percent, respectively (Figure 4a). global tourism trends, which are anticipated to Rice prices also fell in 2014 (Figure 4b). Given the achieve record numbers.6 land area constraints, rice production growth— which had been driven largely by cultivated area 7. Tourism sector growth in 2014 was expansion—will from now on depend more on driven by arrivals from ASEAN countries and improvements in rice yield. Agriculture prices are China. In 2014, while arrivals from Vietnam and not expected to increase as international price 6 International tourism is set to hit a new record by the end of 2014 with 8JETRO’s 2014 Survey on Business Conditions of Japanese-Affiliated over 1.1 billion international tourists travelling the world in one single year. Firms in Asia and Oceania Japanese UNWTO press release, December 2014. (http://www.jetro.go.jp/en/reports/survey/pdf/2015_01_biz.pdf). 7 About 95 percent of foreigners arriving in Cambodia report coming for tourism purposes. Cambodia Economic Update April 2015 >> 4 volatility for most commodities has now returned 2013, and continues to be financed largely by FDI to historical norms. Global food prices gradually (Figure 5). FDI inflows continue, but are declined and the global rice market has become estimated to be below the 2013 level, attracted more competitive with the reentry of Thailand and primarily by the tourism and construction sectors, Myanmar. while the garment sector also received a smaller boost. Gross international reserves (GIR) have Figure 4a Wet season rice (production and yield) improved, reaching a record high of US$4.6 accounting for almost 80 percent of total rice a47 production declined in 2014. billion, or about 4 months of prospective imports,9 at the end of 2014. Figure 5 As export growth decelerates more than offsetting slower import demand, trade deficit deteriorates further. (In US$ million) Figure 4b Wholesale rice prices in selected markets a47 declined in 2014 a) Exports 10. Export growth continues but at a slower pace due to a softer performance in the garment and footwear sectors (Figure 6). The value of other exports, mainly agricultural products, has been hampered by depressed commodity prices although the export volume rose. Although favorable external conditions continue, domestic pressures such as a tighter Source: FAO based on data from Cambodia Agricultural Market Information System. http://www.fao.org/giews/countrybrief/country.jsp?code=KHM labor market and rising wages, as well as the appreciation of the US dollar with Cambodia’s 2. External sector dollarized economy, may have already exerted, and may continue to exert, pressure on profit 9. The external position remains stable, margins and sales in the garment sector (See supported by healthy foreign direct Selected Issue on “Dollarization Issue: investment inflows, underpinning the overall Advantages, Disadvantages, and Ways Forward” macroeconomic stability. The current account deficit (excluding official transfers) is estimated to have slightly widened to 11.2 percent of GDP in 2014, compared with 10.7 percent of GDP in 9 Prospective imports of goods and services. Cambodia Economic Update April 2015 >> 5 for the implications of dollarization, and see also Cambodia’s trade sector is reforming Box 2 Box 2 on the trade reforms that the Royal Government of Cambodia (RGC) is The RGC’s customs and border reforms initiated over the past decade have led to significant improvements. implementing to improve the business Customs procedures are now done through computers at 21 environment).10 Agricultural commodity exports, border checkpoints. The time to clear customs has dropped in particular rice and rubber, have been from 5.9 days in 2010 down to 1.4 days in 2014. Physical inspections have fallen from 29 percent in 2010, to 17 percent increasingly affected by dampened global in 2014. These improvements have contributed to Cambodia agricultural commodity prices. In 2014, the total leaping in just four years 46 positions in the World Bank value of exports year-on-year in US dollar terms is Logistics Performance Indicator (LPI), which ranks country’s trade logistics systems. estimated to have increased by about 10 percent, which is lower than the 22.3 percent seen in 2013. Despite progress, there is still much work needed to improve Cambodia’s trade costs and business environment. Cambodia’s trade costs are around 40 percent higher than the regional average. Its business environment is b) Imports less favorable to private sector development than in many other countries. Its ranking in the overall Ease of Doing 11. Except in construction material Business of the World Bank Doing Business 2015 is 135th out of 189 countries, and its ranking in Starting a Business is almost imports, which were boosted by the booming bottom of the list, at 184th. construction sector, growth of most key imported goods moderated in 2014. Domestic To address this, the RGC has initiated a new wave of reforms since early 2014. Three key reforms in the area of demand during the second half of 2014 was softer trade facilitation are: than previously anticipated due to weaker overall 1. Company registration is being simplified and real economy activity, with the exception of the automated. It is intended to allow applicants to booming construction sector. This led to lower register a new company online in significantly less import growth despite confidence in the economy time, ultimately diminishing face-to-face contact. 2. Automation of the Certificate of Country of being restored. Low oil prices will help contain Origin (COO). In a first phase, the Ministry of imports in 2015, as Cambodia is an oil importing Commerce launched an Interim System, which can country. be used from the Ministry's premises. Work is under way for the system to be fully automated so that Figure 6 companies can apply for the certificate electronically. As export growth decelerates more than 10,000 offsetting slower import demand, trade deficit 0 The new COO system is intended to become an deteriorates further. (In US$ million) electronic payment platform and offer the first e- Other exports -500 8,000 payment facility (with e-signature) for government garment export Trade deficit (RHS) -1,000 services. -1,563.7 -1,500 3. Transition of CAMCONTROL to a modern 6,000 -1,476.9 -1,902.7 Food Safety and Consumer Protection Agency. -1,873.7 -2,000 -2,455.7 This is intended to improve the overall level of food 4,000 -2,598.4 -2,500 safety in Cambodia and reduce duplications with the -3,010.7 -3,345.9 -3,000 General Department of Customs and Excise 2,000 (GDCE). -3,500 0 -4,000 The RGC has requested the private sector to help support 2008 2009 2010 2011 2012 2013 2014e 2015p efforts to reduce informal payments. In response, 17 large Source: Cambodian authorities and World Bank staff estimates and projections companies have recently signed an MOU with the Anti- Corruption Unit, 9 of which are located in the Phnom Penh Special Economic Zone (PPSEZ). This wave of reforms will help Cambodia reduce export and import time and cost and enhance its competitiveness, supporting the economy to make the most of the ASEAN Economic Community 2015. 10Vietnam - European Union Free Trade Agree expected to be signed early this year further increases competition for the EU market which accounts for almost half of the entire Cambodia’s export market. Cambodia Economic Update April 2015 >> 6 3. Inflation compared with US$8.2 billion or 53.4 percent of GDP at the end of 2013. Broad money (BM) 12. Inflation has eased significantly with growth picked up rapidly in 2014 as confidence in continuing depressed food prices and the the banking system returned. BM growth doubled, recent decline in oil prices. Inflation dropped to reaching 29.8 percent year-on-year at the end of 1.2 percent year-on-year at the end of 2014, 2014, compared with only 14.6 percent at the end compared with 4.6 at the end of 2013 (Figure 7). of 2013 (Figure 8). In the consumer price index (CPI) basket, year- on-year price indices of the key non-food sub- Figure 8 BM growth doubled while FCD share in BM continues to rise. (In percent) components such as housing, utilities, and transportation, retreated into negative territory, while the price index of the food sub-component also further eased. Regional and other developing- country inflation has eased since the second quarter of 2014. The decline mainly reflects lower inflation in China in line with its slower growth. Depressed commodity prices have helped to ease inflation among low-income countries, while policy tightening has also contributed to subdued inflation. Food price risks related to El Niño weather conditions that had been anticipated in fact failed to materialize. Figure 7 Declining inflation for Cambodia and regional countries continues. (Y/Y % change) 14. BM growth remains largely driven by foreign currency deposits (FCD). The share of FCDs in BM rose to 83 percent at the end of 2014, compared with 82 percent in 2013, reflecting increased dollarization. The role of the national currency, the riel, continues to be weak, undermining the conduct of monetary policy. See Selected Issue section for advantages and disadvantages of dollarization. Of the 29.8 percent BM growth rate, FCD contributes 25.1 percentage points, riels in circulation account for 3.5 percentage points, while riel deposits account for the remaining 1.3 percentage points (Figures 8 and 9). 4. Monetary sector a) Monetary aggregates, interest rates, and exchange rates 13. As confidence returned, broad money growth picked up rapidly in 2014, strengthening the banking and financial sector. Broad money reached US$10.4 billion or 62.9 percent of GDP at the end of 2014, Cambodia Economic Update April 2015 >> 7 FCD growth is accelerating as confidence in the Figure 9 Figure 10 banking sector returns. Contribution to broad money growth (y/y % change) Confidence in the banking system was restored. 2009 global economic crisis and July 2013 election 15. Gross international reserves reached a 16. The lending rate has edged up slightly record high with healthy foreign direct as domestic credit growth has once again investment inflows, supporting the central rapidly expanded.11 The domestic US dollar bank’s ability to stabilize the banking and interest rate—the US dollar lending rate 12-month financial sector. Gross international reserves weighted average—increased to 11.51 percent per (GIR) rose to a record level of US$4.6 billion, or annum at the end of 2014, compared with 11.3 about 4 months of imports, at the end of 2014. percent at the end of 2013 (Figure 10). The This further strengthens the central bank’s ability domestic US dollar fixed deposit interest rate (12- to support a current account deficit during month weighted average), however, remains at 4.2 external shocks that cause US dollar shortages. percent per annum. As a result of heightened The current GIR level, however, remains low by competition among banks, the interest rate regional standards (see Table 2) and covered only spread—the difference between the nominal 53 percent of private sector deposits at the end of lending rate and the deposit rate—shrunk 2014, down from 103 percent at the end of 2005. between 2010 and 2012, while nonetheless still The central bank’s ability to support a current remaining wide. account deficit, therefore, remains to be further improved. This is particularly so given the context 17. Exchange rate targeting continues to in which the central bank cannot serve as the broadly support price stability. The Cambodian lender of last resort due to dollarization. riel (CR) has hovered at around CR 4,000 per US dollar for several years now. As the US dollar has Table 2 Indonesia Philippines strengthened, so the riel has followed suit, only Lao PDR Thailand Malaysia Vietnam Gross international slightly depreciating against the US dollar from reserves CR 3,995 per US dollar at the end of 2013 up to In bln of US 216.6 111.9 116.1 87.7 38.0 0.75 dollar CR 4,075 per US dollar at the end of 2014. In months of 9.2 7.2 5.6 - 2.6 1.1 Exchange rate targeting—the pegging of the riel prospective imports of to the US dollar—however, does not encourage goods and de-dollarization. Moreover, as regional currencies services Source: Article IV staff reports, IMF (2013 and 2014) are depreciating against the US dollar, dollarization renders Cambodia’s exports less competitive in markets outside the US. However, 11 US Federal Reserve ended its quantitative easing in October 2014. Cambodia Economic Update April 2015 >> 8 the nominal effective exchange rate (NEER) and Figure 12 real effective exchange rate (REER) have depreciated slightly (Figure 11). The NEER index rose to 105.2 in November 2014 from 103.8 at the end of 2013, while the REER index also increased to 111.9 from 109.7 during the same period. Figure 11 Nominal and real effective exchange rates depreciated (Index 2010 = 100) 19. The sectors capturing most of the recent credit expansion are retail, wholesale, construction, real estate, and agriculture. Underpinning the growing services sector, credit to wholesale and retail businesses expanded further, accounting for 35.9 percent of the total credit by October 2014, compared with only 34.3 b) The banking sector percent at the end of 2013. The construction, real estate, and mortage sectors absorbed 19.0 percent 18. Financial deepening continues as of the total credit, compared with only 17.2 deposit and credit growth accelerated quickly percent at end-2013. Credit to the agriculture in 2014, increasing financial intermediation sector also increased, accounting for 10.4 percent and supporting economic growth. Private of the total credit, rising from 10.1 percent in 2013 sector deposits reached US$8.81 billion, or a 30.6 (Figure 13). percent year-on-year increase, at the end of 2014, Retail and wholesale continue to absorb more compared with US$6.88 billion, or a 14.2 percent Figure 13 than a third of the total credit. (In percent) year-on-year increase, at the end of 2013. Credit growth, which decelerated to 20 percent year-on- year during the first half of 2014, once again picked up, reaching 31.3 percent year-on-year at the end of 2014 with an outstanding credit amount of US$8.89 billion. As a result, the loan-to-deposit ratio rose to 87.2 percent at the end of 2014, from 82.2 percent by mid-2014, but down from 90 percent at the end of 2013 (Figure 12). Source: Cambodian authorities Cambodia Economic Update April 2015 >> 9 Box 3 2014-18 Revenue Mobilization Strategy 20. While having many banks helps to at a Glance strengthen competition and underpin efficiency, the lack of scale creates low returns  Main principles: (1) full potential; (2) no new tax; (3) no tax rate increase; and (4) simplicity, equity, efficiency, transparency, on capital for the majority of banks.12 It is and accountability. therefore important to further strengthen the  Three pillars: (1) revenue administration; (2) revenue policy; stability of the financial sector through improved and (3) monitoring and evaluation. inter-agency coordination, strengthened  Target: 0.5 percentage point of GDP current revenue increase per annum. supervision capacity, improved risk management  Policy reviews: excises, value-added tax, tax base (estimated practices in the banking sector and enhanced regime category), tax incentive, and property tax. Studying quality of banks’ assets. income tax and drafting state property law. 5. Fiscal sector Annual targets by general department General department 2014b 2015p 2016p 2017p 2018p 21. Fiscal consolidation continues as (In percent of GDP) improved collection and contained spending GDCE 6.85 7.08 7.24 7.39 7.54 help improve overall fiscal deficits and sustain Change 0.23 0.16 0.15 0.15 macro-fiscal stability. Improved revenue GDT 5.87 6.26 6.62 6.97 7.29 provides additional resources to finance rising wage and priority spending. Thanks to the Public Change 0.39 0.36 0.35 0.32 Non-tax Financial Management Reform Program revenue 2.48 2.35 2.40 2.45 2.51 (PFMRP), domestic revenue collection has Change -0.13 0.05 0.05 0.06 accelerated further and is estimated to have Total 15.20 15.69 16.26 16.81 17.34 reached 16.1 percent of GDP in 2014, compared GDCE: General Department of Customs and Excise with 15.1 percent collected in 2013. Expenditure GDT: General Department of Taxation b = budget; p = projection remains contained as budgeted at 20.5 percent of Areas of focus GDP. The overall fiscal deficit (including grants), however, has only slightly improved and reached General Measures or focused areas 2.5 percent of GDP because of a dwindling grants department Automated manifest, risk management, post- component, compared with 2.7 percent of GDP clearance audit, anti-smuggling, single window, GDCE in 2013. institution, human resources, and audit strengthening a) Revenue composition GDT Registration, services, tax audits, debt, organization, human resources, and technology 22. Total general government domestic Non-tax Receipting system, civil aviation, tourism, visas, telecom, leases, public enterprises, casinos, and revenue is estimated to have reached 16.1 revenue privatization percent of GDP, or US$2.68 billion in 2014, thanks to improved revenue administration, Source: Cambodian authorities creating increased fiscal space (Figure 14). This represents a 1.0 percentage point of GDP RMS is expected to address key weaknesses in improvement, outperforming the target of 0.5 of revenue administration supporting the broadening a percentage point of GDP per annum increase set of the tax base while maintaining existing taxes under PFMRP. To further strengthen revenue and tax rates. collection, the authorities have recently adopted a medium-term 2014-18 Revenue Mobilization Strategy (RMS) (see Box 3 for more details). The 12Cambodian banks: high growth opportunity versus low return on equity conundrum, Mekong Strategic Partners, November 2014. Cambodia Economic Update April 2015 >> 10 Figure 14 c) Fiscal balance 24. Increased revenue collection helps to promote sustainable fiscal performance, while improved spending efficiency also strengthens public sector service delivery. The overall fiscal deficit (including grants) is estimated to have improved further, reaching 2.5 percent of GDP in 2014 compared with 2.7 percent of GDP in 2013 (Figure 16). The deficit continues to be financed by external funds (Figure 17). As a result, government deposits rose to US$1.13 billion at the end of 2014, compared with US$700 million at the end of 2013. Government deposits are e= estimate; b = budget crucial for Cambodia as they can be used as a fiscal Source: Cambodian authorities stimulus to mitigate external shocks without b) Expenditure composition resorting to additional borrowing. Note that, as explained in the monetary sector section above, 23. Total general government spending is the country’s monetary policy is constrained by estimated to have remained in line with the dollarization. budgeted 20.5 percent of GDP in 2014, or Figure 16 US$3.4 billion, consolidating the authorities’ fiscal position to strengthen fiscal buffer (Figure 15). This represents 1.0 percentage point of GDP below 2013 total spending of 21.5 percent of GDP. The authorities appear to be tightening spending, in particular capital expenditure, in the post-fiscal stimulus period as spending efficiency is further strengthened. Further broadening of the country’s fiscal space, however, is potentially being constrained by a rapidly rising wage bill. Figure 15 e= estimate; b= budget Source: Cambodian authorities Cambodia Economic Update April 2015 >> 11 Figure 17 Box 4 2015 Annual Budget and Budgetary Reforms A number of key budgetary reforms have been introduced in the 2015 annual budget: Government-financed or domestically financed budget for capital spending is now fully appropriated for all ministries. Up to 2014, capital budget appropriations were made for only four ministries: Water Resources and Meteorology; Rural Development; Public Works and Transport; and Land, Construction, and Urbanization. Unlike previous years, the full appropriation for 2015 does not leave any in-year discretionary budgetary decisions beyond sector ministries’ control, thereby improving capital budget allocation management and transparency. Donor-financed or externally financed component is now budgeted for all ministries. Previously, due to fragmentation in budget management which separated donor-financed from government-financed components, 25. A joint World Bank/IMF debt ministries were not able to see a full “picture” of their sustainability analysis (DSA) conducted in budgets. The improvements introduced in the 2015 annual budget supports the implementation of the 2013-18 2013 showed that Cambodia’s debt distress Budgetary Reform Strategy and are consistent with de- rating remained low, with all debt burden concentration of budget management for better linkages between annual budget and policy priorities as well as for indicators projected to remain below their accountability and results. respective thresholds.13 The size of Cambodia’s external debt (including arrears) is projected to A long outstanding issue of large cash advances is have reached US$ 5.6 billion or 33.9 percent of being addressed. Cash advances were partly responsible for holding up end-year financial reports from being GDP in 2014. finalized timely and were therefore, delaying annual budget audits. The 2015 budget allocates CR 276,500 million (US$69 million) to write off cash advances made between 2004 and 2014 so that a “clean” budget balance begins in 2015 for the implementation of the Financial Management Information System (FMIS). The Public Financial Management Reform Program (PFMRP) is helping reduce and ultimately eliminate large cash advances through streamlined commitment and payment processes. The 2015 budget circular appropriately discusses key reform priorities. The prioritization for general administration is strengthening land management and judicial reforms; linking salary increase and payroll reform under the public administrative reform (PAR); and promoting cross-cutting areas under PFMRP, PAR; and anti- corruption. The social sector’s priorities include education quality, technical training, skills, health services, health equity funds, pension funds, and social safety nets. The economic sector’s priorities cover strengthening of the management of land concessions and national resources, improvement of tourism value addition, and expansion and maintenance of road and irrigation systems. 13By the time of the writing of April 2015 Cambodia Economic Update, the new DSA exercise has not yet been conducted. Cambodia Economic Update April 2015 >> 12 d) 2015 Budget US$250 equivalent) a month by 2018, annual wage budget increases (Figure 18) need close 26. Budgetary reforms under the PFMRP monitoring.14 To achieve this target, some have enhanced the linkages between the 2015 estimates put the annual total wage bill increase budget law and priorities. As a result, budget (civilian, security and defense) at up to 20 percent, appropriation, integration, and transparency have well above the annual increase in domestic markedly improved. Both domestically financed revenue of around 15 percent projected under and externally financed budgets are fully RMS. The non-wage component continues to be appropriated for all line ministries, serving a compressed, having not risen as a percentage of complete budget integration and supporting the GDP since 2011. It is, therefore, important to authorities’ pursuance of program-based and ensure that priority spending, including operations result-based budgeting linked to national and and maintenance budgets (under non-wage sectoral strategies and priorities. The component), are adequately funded. improvement also lays a solid foundation for a successful implementation of the Financial Figure 18 Management Information System (see Box 4 for more details). 27. In the 2015 budget, budgeted revenue can be further improved. A conservatively budgeted revenue target, together with a declining grants component, gives rise to an overall deficit (including grants) forecast at 3.8 percent of GDP in 2015, compared with 2.5 percent of GDP estimated for 2014 (Figure 16). The domestic revenue budgeted for the 2015 fiscal year, at 15.9 percent of GDP, appears conservative and slightly below the estimated collection of 16.1 percent of GDP in 2014. It is, however, higher than the 15.5 percent of GDP budgeted for in 2014. The 2015 budgeted revenue target continues to rely on 29. Given existing capital budget indirect tax. Non-tax revenue of 1.97 percent of constraints, maintaining capital investment GDP budgeted for in 2015 is somehow lower than needs will only be possible with further the target of 2.35 percent of GDP set in the improved spending efficiency and enhanced Revenue Mobilization Strategy (RMS). Total public investment quality control (Figure 19). general government spending is budgeted to To maintain public investments in sound remain at 20.5 percent of GDP in 2015. The condition, additional allocations for the budgeted fiscal deficit excluding grants has operations and maintenance budget will be therefore slightly widened, budgeted at 4.6 percent required. Stepping up quality control of public of GDP in 2015, compared with 4.3 percent of capital investments, in particular for infrastructure GDP in 2014. projects, will improve spending efficiency and promote savings, such as in the case of the 28. The rapidly rising wage bill will need pharmaceutical budget discussed below. to be closely monitored. With a target of having a minimum public sector wage of CR 1 million (or 14Public forum on 2015 budget law (risks and challenges section), December 22, 2015, Ministry of Economy and Finance Cambodia Economic Update April 2015 >> 13 Figure 19 Figure 20 30. Social sector spending has notably improved on two fronts: increased allocations and improved efficiency. The education Box 5 allocation rose to 2.17 percent of GDP in the 2015 Poverty trend measured under the international budget, up from 1.97 percent of GDP in the 2014 US$ 1.25/day Purchasing Power Parity (PPP) budget (Figure 20). With 40 percent savings in the Poverty in Cambodia under the U$ 1.25 PPP a day pharmaceutical budget stemming from improved measure (which allows for international comparisons) procurement, the health allocation as a share of was 6.0 percent in 2012 , compared to 28.8 percent in GDP declined to 1.37 percent of GDP in 2015 Lao PDR, 15.4 percent in the Philippines, and 10.9 budget, down from 1.45 percent of GDP percent in Indonesia; all countries with a GDP per budgeted for 2014. The health budget increased in capita at least 1.5 times that of Cambodia. While the US$1.25 PPP poverty declined at an impressive annual absolute terms, reaching CR 1,023 billion in 2015, average of 5.8 percentage points between 2007 and up from CR 978 billion in 2014. The savings from 2009, it slowed down to 1.36 percentage points between the pharmaceutical budget will be used to fully 2010 and 2012. The slower pace of poverty reduction in finance health equity funds. the recent years stems largely from a decelerating agricultural sector, on which the poor are dependent. 6. Poverty reduction 31. Poverty has continued to fall, but at a slower pace than before. As of 2012, the poverty headcount rate (according to the national poverty line) was 17.7 percent, almost 3 percentage points lower than in 2011, a pace of reduction that is significant, although slower than during the 2007- 09 period (Figure 21).15 15 The national poverty line for 2012 is riel 4,654.7 (nominal terms). Cambodia Economic Update April 2015 >> 14 32. Overall, growth has been pro-poor in poverty reduction appear to be moderate. The decline will directly benefit consumers, given that Poverty headcount rate continues to decline Figure 21 but at a slower pace there are no price controls. The 20 percent fall in 60% 53.2% 800 local domestic prices at most represents a 1.5 655 percent consumption gain for the average Per capita GDP (constant US$ 2005) 50% 554 600 household in Cambodia. But the benefits are even less for poorer households, as fuel (and most oil 40% Poverty rate 30% 410 24% 400 related goods) represents a smaller share of their 20% 17.7% household budget. 200 10% 0% 0 2004 2007 2008 2009 2010 2011 2012 2004 poverty line is 2012 poverty line is $0.63 per person per day $1.20 per person per day Source: Cambodian authorities and World Bank staff estimates the recent past. Consumption in the bottom 40 percent of the consumption distribution grew at an average annual rate of 7 percent during 2007- 12, almost double the 3.6 percent rate for the total population. This was mainly the result of a dynamic agricultural sector. Inequality has declined significantly, with the Gini coefficient falling from 32 in 2008 to 28 in 2012. Nonetheless, the progress in equality has slowed in the past few years. Poverty in Cambodia under the U$ 1.25 PPP a day measure (which allows for international comparisons) was 6.0 percent in 2012 (See Box 5 for more detail). 33. In the next few years, rural poverty is likely to decline at a slower rate than in the past. In rural areas, further poverty reduction will be made more challenging due to slow crop yield improvement and reduced international agricultural commodity prices. 34. As in recent years, it is likely that inequality will decrease at a slower pace in Cambodia in the near term. The projected sources of economic growth in the short to medium term, mainly the construction, garment and tourism sectors, are unlikely to favor the poor disproportionately. 35. In the case of Cambodia, the expected effects of the recent oil price decline on Cambodia Economic Update April 2015 >> 15 Key messages and rice losing the competitiveness it has at farm gate prices) can be done in a relatively in a short time recommendations with a strong commitment. Second, further improving access to finance for rice producers and millers to increase milling volumes and reduce milling costs, requires a short- to medium-term 36. The key challenge will be to stimulate response time. Finally, increasing public the agriculture, garment, and tourism sectors investment in agricultural advisory services, seed to boost economic growth and reduce poverty development and irrigation infrastructure to further. enhance shock resilience, and the opening up of new markets will have high impact but will be 37. Revitalizing garment sector growth in relatively time consuming and resource intensive. particular, as well as growth in the For more detailed set of recommendations see the manufacturing sector more generally, will be forth-coming World Bank study “Agriculture in instrumental in maintaining high growth and Transition”. macroeconomic stability. This can be achieved in the short- to medium-term timeframe. First, to 39. To improve tourism sector growth, further strengthen and diversify exports, it will be efforts can be made to increase the time and vital to maintain stability in the labor market to money spent by tourists in Cambodia. This benefit from relocation of industry from China. could be done by improving road transportation Second, it will be necessary to improve the (linking borders, Siem Reap, key coastal areas and business environment through the simplification Phnom Penh), together with greater investment and automation of business registration and trade and coordination of efforts between central and facilitation processes, and the development of an local governments, the private sector, and local enhanced investment law (see World Bank communities. Such efforts would all help to Investment Climate Assessment 2014). Finally, promote the diversification of tourist destinations from a medium-term perspective, addressing the beyond the Angkor Archeological Park. high cost of electricity by speeding up the Promotion of regional tourist destinations and incorporation of additional power supply from travel arrangements would also help capture a hydro and coal-fired power plants, making larger share of the world tourism market, which is efficiency improvements, and fostering growing. transparency of solicitation in power distribution and supply provision will also be positive. 40. Safeguarding stability in the rapidly expanding financial sector will help to ensure 38. Given land area constraints, rice sustainable economic growth. Enhanced production growth—which had been driven banking supervision in the nascent but rapidly largely by cultivated area expansion—will expanding financial sector will help to prevent depend more on increases in rice yield and bubbles developing in the construction and real quality. Successes in revitalizing pro-poor estate sectors, while also strengthening the agriculture growth will likely be obtained mostly in country's resilience to possible higher volatility in the medium-term timeframe due largely to international financial markets. With strong inter- continued dampened agricultural commodity ministerial coordination and commitment, prices while the supply response may also take successes in this area can be obtained in the short time. First, reducing logistics costs (with the term as the technical and managerial capacity of establishment of a Logistics Task Force for Inter- the monetary and economic authorities has been ministerial Coordination) and doing business costs (to help address the main reasons for Cambodian Cambodia Economic Update April 2015 >> 16 improved after years of continued successful alone will not be sufficient to improve service performance. 16 delivery. It will therefore be important to closely link pay increases with improved human resource 41. Cambodia will greatly benefit from management and performance outcomes. further improved investments and spending Furthermore, wage increases will require close efficiency in health, education and social monitoring in order to ensure that they remain protection, translating into significant affordable. productivity and welfare gains in both the short and long run. Although the country has seen major improvements in terms of coverage, low education attainment and malnutrition are more prevalent among the poor population. Despite Cambodia’s remarkable progress in poverty reduction, most households that have escaped poverty have done so only by a small margin and remain ‘near-poor’, leaving them highly vulnerable. Recent initiatives with the introduction and funding of health equity and retirement funds are steps in the right direction. However, a better understanding of the coping mechanisms available for vulnerable households and their effectiveness would help to mitigate the risk of them falling back into poverty. 42. Further broadening of the tax base and strengthening of tax administration will help to improve collection, which is required to finance much needed development spending. Meanwhile, the rapidly rising wage bill will need close monitoring. Increased public investment to strengthen the agriculture and tourism sectors, as well as to support overall structural reforms discussed earlier, requires enhanced efficiency in public spending and additional financial resources. It will therefore be important to continue improving domestic revenue collection by further broadening the tax base and strengthening tax administration. Improvements in revenue collection continue to be made almost continuously and, therefore, it is import to keep up the efforts to further improve administration and good governance. While the rising wage bill clearly helps to improve living conditions of poorly paid civil servants, wage rises 16 The inter-agency coordination may include but not limited to the National Bank of Cambodia, the Ministry of Economy and Finance, and the Securities and Exchange Commission of Cambodia. Cambodia Economic Update April 2015 >> 17 Selected Issue –Dollarization Issue: Advantages, Disadvantages and Ways Forward 1. Motivation The objective of this selected issue on “Dollarization Issue: Advantages, Disadvantages, and Ways Forward” is to provide some views and lessons learned to support current efforts being made by the RGC to strengthen the use of the local currency, the Cambodian riel. 2. Brief background In the late 1980s and early 1990s, Cambodia resorted to domestic bank financing to finance its fiscal deficits, which resulted in hyperinflation.17 This appeared to encourage the use of other currencies such as the US dollar (and to a lesser extent the Thai baht) to substitute the local currency. US dollar substitution for the Cambodian riel Figure S1-1 began in 1992, when large inflows of US dollar provided to fund the first general election were allowed to perform all money functions alongside with the riel.18 Driven by continued free inflows of US dollars as the country opened up to foreign aid and investors, the share of foreign currencies (mostly US dollars) deposits in broad money rose rapidly from 36 percent (US$30.7 million) at the end of 1993 to 63 percent (US$145.8 million) at the end of 1996, effectively turning the primary currency—the riel— into the secondary currency over a period of just three years.19 The widespread use of US dollars by a country’s residents is a phenomenon called dollarization. Since 2007, the share of foreign currencies in broad money has reached around 80 percent and the economy has become dollarized (Figure S1-1). The share of US dollar deposits in total deposits has fluctuated between 92 percent and 98 percent during the past two decades. By December 2014, US dollar deposits reached almost US$8.6 billion, more than half the size of the economy. The total value of US dollars in circulation, however, remains unknown. Various domestic and external factors determine the relative strengths of the costs and benefits of dollarization, as discussed below. 3. Advantages The economy has achieved an impressive performance during the past two decades. This has led some to believe that dollarization in Cambodia has been a blessing, underpinning macroeconomic stability and growth, although such a hypothesis remains to be studied. A number of major advantages of dollarization are as follows: 17 Printing money. 18 Tal Nay Im and Michel Dabadie 2007, Dollarization in Cambodia. 19 In the absence of effective monetary policy measures by the central bank to absorb US dollar inflows. Cambodia Economic Update April 2015 >> 18 First, dollarization is known to constrain cash-strapped governments from resorting to domestic financing, a major cause of spiral inflation in the late 1980s and early 1990s in Cambodia. Dollarization, together with exchange rate targeting—pegging of the riel to the dollar—is considered to have anchored price levels. In a context of dollarization and a pegged riel to the US dollar, people think in terms of dollars, and prices in the domestic currency are indexed to the exchange rate; e.g., the price of local products tends to rise like the price of imported products when the riel depreciates (Im and Dabadie, 2007).20 Therefore, a stable riel versus US dollar exchange change rate supports stable prices. Second, during times of external shocks when there is a US dollar shortage, the total value of US dollars in circulation can help finance current account deficits, a role often played by foreign reserves. For instance, this contributed to Cambodia coming out relatively unscathed from the 1997 East- Asian Financial Crisis.21 Figure S1.2 Third, other proponents of dollarization believe it is most beneficial to a small open economy, like Cambodia, heavily trading with other dollarized partners, with a business cycle highly correlated with that of the US. They see Cambodia’s monetary policy focusing on supporting economic growth rather than counter-cyclical stabilization.22 Fourth, by eliminating exchange rate risk, dollarization attracts capital inflows and facilitates high level of openness, fostering Cambodia’s liberal trade and investment regimes.23 4. Disadvantages The Cambodian authorities acknowledged in its Rectangular Strategy (RS) Phase 3 that the economy remains highly dollarized which imposes limitations on monetary policy. The RS, therefore, opts for the continuation of a managed float exchange rate regime to maintain stability of the riel, while strengthening public and investor confidence in the local currency to promote its greater use and reduce the high level of dollarization.24 The 2014-18 National Strategic Development Plan (NSDP) of the RGC also calls for a greater control over the economy, especially monetary policy, and concludes that de-dollarization should be the first step toward this.25 Specifically, the NSDP advocates the utilization of riel-denominated 20 Tal Nay Im and Michel Dabadie 2007, Dollarization in Cambodia. Prices of most goods (and services) in Cambodia are indexed by suppliers to riel versus US dollar exchange rate (and to riel versus Thai baht exchange rate as well). For instance, a dozen of locally produced oranges cost CR 10,000 when the riel versus dollar exchange rate is CR 4,000; this means the dozen of oranges cost US$2.5. If riel depreciates to CR 4,100 per US dollar, the same will cost CR 10,250 (the cost likely reaches CR 10,300 as Cambodia does not circulate riel 50 bank note anymore); and this is equivalent to US$2.51, a full exchange rate “pass-through” to prices. 21 During the crisis, Cambodia did not experience any major devaluation while Thai Baht lost 54 percent of its value against US dollar between June 1997 and January 1998. Cambodia’s real growth rate was 4 and 5 percent in 1997 and 1998, respectively (followed by double-digit growth for the subsequent two years in a row) while Thailand’s growth contracted by 2.8 percent and 7.6 percent in 1997 and 1998, respectively. 22 Box 7.1: Full Dollarization, De-Dollarization, or Status Quo? Cambodia Sustaining Rapid Growth in a Challenging Environment, Country Economic Memorandum 2009, the World Bank. 23 Hellerstein and Ryan 2011, Federal Reserve Bank of New York Staff Report, Cash Dollar Abroad, February 2011, one percent higher openness ratio (defined as a country’s total imports and exports divided by GDP) is associated with 1.32 percent higher US dollar flows (page 22). 24 See pages 7 and page 18, the Rectangular Strategy Phase 3 (Unofficial English version), RGC 2013. 25 See para 6 on page 8, the 2014-2018 National Strategic Development Plan (NSDP) (Original Khmer version). Cambodia Economic Update April 2015 >> 19 investments, such as treasury bills and government bonds.26 The main disadvantages of dollarization are discussed below. Figure S1.3 Depreciation of regional currency versus US First, dollarization at least partly renders dollar exchange rates. Cambodia’s exports and the production of (Indices: April 2010 = 100) 150.0 tradable goods less competitive compared with 140.0 its low-income peers due to nominal exchange 130.0 rate appreciation vis-à-vis other currencies. With 120.0 dollarization, an exchange-rate peg, and a liberal trade and investment regime, wide currency account deficits 110.0 persist (Figure S1.2), resulting in increased 100.0 vulnerability to external shocks.27 In addition, many 90.0 regional currencies have depreciated against the US 80.0 dollar over the past five years (Figure S1.3) and the Oct-10 Jan-11 Oct-11 Jan-12 Oct-12 Jan-13 Oct-13 Jan-14 Oct-14 Jan-15 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 lack of monetary policy flexibility in the face of an Thai Baht/US$ Malaysian ringgit/US$ VN dong/US$ appreciating exchange rate is becoming a concern.28 Indo rupiah/US$ Phil Peso/US$ Bangladesh Taka/US$ Indian Rupee/US$ Lao Kip/US$ As discussed the real sector above, in value terms, the Source: xe.com share of Cambodia’s garment export to the EU rose to 40 percent of the total garment exports while that to the US was only 34 percent in 2014. The recent US dollar versus Euro appreciation reduces Cambodia’s export competitiveness to the country’s largest export market, the EU.29 Second, some rough estimates put the loss of seigniorage at between US$1 and US$2 billion.30 Seigniorage is the gain (or loss) resulting from circulating the face value of a currency minus the cost of Table S1-1 – Various estimates of US dollar cash in circulation in producing it. There are three types of seigniorage Cambodia in their respective years Kang Im and Feige Article IV losses (Kang, 2005)31: (i) direct losses from (in bln of US$) (2003) Dabadie (2006) (2010) renouncing the printing of a currency by allowing US (2006) US dollar cash in *1.01 3.5 2.00 - dollars to circulate freely; (ii) annual seigniorage loss circulation due to an inability to conduct “inflation neutral” (Derived) 0.75 2.7 2.02 1.23 seigniorage loss (2010) currency injection;32 and (iii) forgone interest income Source: Is dollarization good for Cambodia? Global Economic Review, Kiwon Kang, 2005 by the central bank as a result of not being able to Dollarization in Cambodia, Tal Nay Im and Michel Dabadie, 2007 New estimates of US currency abroad, Edgar L. Feige, 2011 collect or lend the US dollar cash that is currently in IMF Article IV staff report (2010), Box 2. Seigniorage loss could range from 5-19 percent of GDP (mid-point: 14% of GDP or US$ 1.23 bln) estimated based on currency in circulation in comparator low-income countries in Asia. circulation. To find out the amount of seigniorage *Using Kang’s method to estimate US dollar in circulation in 2003 loss, one would have to first quantify the unrecorded amount of US dollar cash in circulation which is hard to estimate precisely. Estimates vary as shown in Table S1-1, and they are significant. 26 See para 3.45 on page 159, the 2014-2018 NSDP (Original Khmer version). 27 In general, current account deficits driven by trade deficits which are caused by high demand for capital goods and raw material imports needed to develop production sectors such as agriculture and manufacturing sectors during the early stage of economic developments are appropriate. However, persistent current deficits driven by sustained high import demand that is fueled largely by domestic consumption including less productive investments in some sectors such as construction, land, and real estate in a speculative nature actually increase vulnerability to external shocks. 28 Box 7.1: Full Dollarization, De-Dollarization, or Status Quo? Cambodia Sustaining Rapid Growth in a Challenging Environment, Country Economic Memorandum 2009, the World Bank 29 For Cambodia, garment exports account for 75 percent of total exports. 30 A survey reportedly discussed in a 2006 US treasury report revealed that Cambodia was holding US$2 billion in cash or 0.7 percent of the total US$281.7 billion bills classified as “foreign holdings of US currency”, while during the period 1994-2010, US Federal Reserve’s seigniorage earnings is US$289 billion (Feige, 2011). Let’s conservatively assume that Cambodia continued to hold only 0.7 percent of the total US dollar cash abroad i n 2010; this implies that seigniorage loss for Cambodia is about US$2.023 billion (US$289 x 0.7%) as of 2010. 31 K. Kang: Is dollarization good for Cambodia? Seowon University, Republic of Korea. 32 As economy grows, the volume of circulation currency also increases. The government can print money without inflation as long as the amount of money supplied is no more than the amount required by the economic growth. Cambodia Economic Update April 2015 >> 20 Third, dollarization and exchange targeting may not anchor price levels as well as one might expect. Cambodia’s inflation is almost as volatile as that of Vietnam (Figure S1.4), and it is not much better than regional peers. In the wake of the 2008 global financial crisis, Cambodia’s inflation skyrocketed due largely to “imported” inflation caused by world food and petroleum price shocks. This happened because dollarization facilitates (with freely circulated US dollars and riel) full “pass-through” of prices of imported goods denominated in US dollar to prices of domestically produced goods denominated in riel. This is because domestic producers hedged to maintain not only US dollar equivalent value of their goods but also the purchasing power received from selling their goods. In this regard, domestic producers effectively “index” prices of their domestically produced goods to prices of imported goods, and increase prices of their goods when imported goods become more expensive, although the riel versus US dollar exchange rate remains stable. Cambodia inflation is almost as volatile Fourth, the key feature of dollarization is a fixed Figure S1.4 as that of Vietnam and not much better exchange rate (riel versus US dollar exchange rate than regional peers. (Y/Y % change) peg) which constrains trade policy.33 As a result, the 45 Cambodia Thailand Vietnam Laos 45 Cambodian authorities are unable to protect the 40 China Malaysia Singapore 40 economy from external shocks through the control of 35 30 35 exchange rates.34 30 25 25 20 20 Experience in El Salvador shows that dollarization 15 15 does not automatically lead to higher growth rates. 10 10 This is because it does not make up for a poor business 5 0 5 climate, high crime rates, or widespread violence.35 -5 0 -10 -5 Ways forward Jan-06 Nov-06 Oct-09 Jan-11 Nov-11 Oct-14 Feb-08 Feb-13 Jun-06 Jul-08 Mar-10 Jun-11 Jul-13 May-09 Aug-10 May-14 Apr-07 Apr-12 Sep-07 Dec-08 Sep-12 Dec-13 5. Source: Cambodian authorities In the early stages of development of the banking sector, with its newly established monetary authorities, human resources capacity and a regulatory framework to manage monetary policy in Cambodia were weak. Therefore, at that time, the benefits of dollarization outweighed the costs. Dollarization helped to avoid the hyperinflation and supported the earlier structure of international trade in which the US was the main export market for Cambodia’s narrowly based export products, namely garments. As Cambodia’s export products and destinations have become more diversified, dollarization has led to reduced competitiveness. But the constraints imposed by dollarization are becoming particularly apparent for the management of Cambodia’s rapidly expanding banking and financial sector. It is therefore important to restore the central bank’s ability to serve as lender of last resort in the case of a sudden large shock. The ratio of gross international reserves to private sector deposits reached its record low of 53 percent in December 2014, down from 103 percent in December 2005, reducing the central bank’s capacity to stabilize the banking system when facing a financial crisis. Other countries also seek to limit the extent of dollarization, owing to its potentially adverse effects on macroeconomic policy and financial stability (Kokenyne, Ley, and Veyrune, 2010). 33 In dollarized economies, local authorities are likely to peg their local currencies to the US dollar because: (i) if they devalue their local currencies, their economies could become fully dollarized; (ii) if they overvalue their currencies, they could be running down their international reserves. 34 Kang (2003) argues that currently, most goods are produced (and imported) and sold (and exported with their prices expressed in US dollars. Under the situation that more than 70 percent of all transactions use the US dollar, the exchange rate (riel versus US dollar) seems to lose most of its original meaning. 35 De-dollarization workshop (2014), dollarization and de-dollarization experiences in LAC, Auguste Kouame, the World Bank, Cambodia Economic Update April 2015 >> 21 “Once dollarization takes hold, economic agents are reluctant to switch back into using the local currency, because they lack confidence and the cost of redenominating transactions is high until a consensus is reached among market participants to use the local currency.” (Kokenyne, Ley, and Veyrune, 2010). In addition, Cambodia’s exceptional economic performance and investors’ confidence actually drive dollarization, instead of decreasing it, as the country attracts large capital inflows (Menon, 2008; and Duma, 2011). A weak correlation between deposit dollarization (and credit dollarization) with the nominal riel versus US dollar exchange rate also helps to confirm this.36 This implies that dollarization in Cambodia is likely to stay unless addressed. Developing a roadmap to increase the use of riel, as currently planned by the authorities, is a positive step. First, determining: (i) what monetary framework—inflation targeting or exchange targeting (pursuing a basket of currencies to anchor expectations while minimizing volatility for the tradable sector)—is the most appropriate; and (ii) how to promote confidence in such a framework. Second, further enhance the capacity to run proper monetary policy. Third, learning from the experience of a number of successful countries.37 See Table S1-2 for a summary of key macroeconomic settings that promote de-dollarization.38 Prudential measures, developing domestic currency capital markets together with foreign exchange markets, and exchange rate appreciation promote de-dollarization.39 The implicit guarantee of a stable exchange rate may instead reinforce dollarization by encouraging borrowing in US dollars. Table S1-2: Main factors driving de-dollarization Country Key macroeconomic settings Prudential regulations under banking and Deposit and credit financial sector de-dollarization Peru  Improved fiscal balance  Large spread between reserve requirements in foreign and  Credit dollarization of 40%  Debt reduction to 19.6% from 48.2% of GDP domestic currencies (2014) reduced from 82%  Appreciation of exchange rate  Remuneration rate on reserve requirements increased in (1992)  Sterilized foreign exchange market intervention domestic currency, exceeding that in foreign currency  Deposit dollarization of 32%  Improved international reserve position  Provisioning requirements for foreign currency loans – building (2014) reduced from 63% a reserve from 0.25% to 1% of credits in foreign currency (1992)  Development of capital market in local currency  Inflation targeting  Liquid assets in domestic currency is 8% while those in foreign currency is 20%  Bank’s long open position reduced from 100 percent to 75 percent of capital Bolivia  Nominal appreciation (Bs/USD) 7.0 (2013) vs 7.5 (2002)  Higher exchange rate bid-ask spread, from 1 to 10 cents  Credit dollarization of 11%  Real appreciation (2005=100): 69.0 (2013) vs 83.0 (2002)  Tax of 0.3 percent on dollar financial transactions (2013) reduced from 74%  Fiscal balance (% of GDP): 0.7% (2013) vs - 8.8% (2002)  Higher mandatory reserves on dollar deposits from ~10% to (1996)  Public debt reduction (% of GDP): 37.3% (2013) vs 84.8% (2002) 67% in 2006  Deposit dollarization of 23%  Improved foreign reserves (% of GDP): 47.6 (2013) vs 11.3 (2002)  Provisions for foreign currency loans up to 1.5% (2013) reduced from 94%  Bank’s long open position reduced to 60% from 70% (1997)  Development of capital market in local currency  Inflation 6.5 (2013) vs 2.4 (2002) Sources: World Bank, De-dollarization workshop (2014) and dollarization and de-dollarization experiences in LAC, Auguste Kouame. 36 There are two types of dollarization: (i) deposit dollarization measured by US dollar deposit as a share of the total deposit; and (ii) credit dollarization measured by US dollar credit as a share of total credit. All other things being equal, depreciation of the riel increases the attractiveness of the US dollar and leads to increased dollarization and vice versa. Correlation between deposit dollarization and credit dollarization with the nominal exchange rate of only 0.47 and 0.24, respectively implies the nominal exchange rate changes (appreciate or depreciate) only weakly affect (decrease or increase) deposit and credit dollarization. 37 A numbers of Latin American and Eastern European countries namely Peru, Paraguay, Uruguay, Bolivia, Armenia, and Georgia that have made good progress towards de-dollarization 38 IMF working paper (2011), what is driving financial de-dollarization in Latin America? Mercedes Garcia-Escribao and Sebastian Sosa 39 Hayk Avertisyan (2014), de-dollarization policy in Armenia: a room for policymaking, workshop on de-dollarization policies and challenges, Research Center of the Central Bank of the Republic of Armenia, December 12-13, 2014, Dilijan, Armenia. Cambodia Economic Update April 2015 >> 22 Cambodia: Key Indicators 2011 2012 2013 2014e 2015p 2016f 2017f Year Year Year Year Year Year Year Output, Domestic Demand and Prices Real GDP (% change yoy) 7.1 7.3 7.4 7.0 6.9 6.9 6.8 Domestic demand (% change yoy) 11.3 14.9 12.1 12.4 11.0 10.7 11.1 Consumer price index (eop, % change yoy) 4.9 2.5 4.6 1.2 1.5 2.0 2.0 Public Sector Government revenues (% GDP) 13.2 15.3 15.1 16.1 16.0 16.3 16.8 Government expenditures (% GDP) 22.8 21.0 21.5 20.4 20.5 20.5 21.0 Government balance excluding grants (% GDP) -9.6 -5.7 -6.4 -4.3 -4.5 -4.2 -4.2 Government balance including grants (% GDP) -4.6 -3.3 -2.7 -2.5 -3.8 -4.9 -4.7 Foreign Trade, BOP and External Debt Trade balance (US$ million) -1,490.0 -2,455.7 -2,598.4 -3,010.7 -3,345.9 -3,606.9 -3,897.3 Exports of goods (US$ million) 5,219.5 5,632.8 6,890.2 7,569.1 8,397.7 9,487.2 10,768.0 (% change yoy) 34.4 7.9 22.3 9.9 10.9 13.0 13.5 Key export (% change yoy) 1/ 31.7 7.0 17.6 11.7 12.0 14.0 14.0 Imports of goods (US$ million) 6,709.5 8,088.5 9,488.6 10,579.8 11,743.6 13,094.1 14,665.4 (% change yoy) 22.7 20.6 17.3 11.5 11.0 11.5 12.0 Current account balance (US$ million)2/ -881.9 -1,366.0 -1,639.0 -1,853.2 -2,157.7 -2,259.9 -2,441.0 (% GDP) -6.8 -9.6 -10.7 -11.2 -11.7 -11.6 -10.9 Foreign direct investment (US$ million) 1,343.8 1,697.9 1,826.1 1,717.4 1,660.0 1,620.0 1,590.0 External debt (US$ million) 3,913.4 4,559.3 5,124.1 5,630.6 6,019.1 6,380.5 6,692.7 (% GDP) 30.4 32.1 33.4 33.9 32.7 32.9 29.9 Debt service ratio (% exports of g&s) 1.1 1.1 1.1 1.3 1.3 1.6 1.4 Foreign exchange reserves, gross (US$ million) 3,031.6 3,463.0 3,642.5 4,657.9 5,120.0 5,530.0 5,960.0 (months of prospective imports of g&s) 3.4 3.1 3.5 4.0 3.9 3.8 3.7 Financial Markets Domestic credit (% change yoy) 37.3 29.6 26.7 28.7 27.0 25.8 25.0 Short-term interest rate (% p.a.) 15.3 11.6 11.3 11.5 12.0 12.2 11.8 Exchange rate (Riel/US$, eop) 4,039.0 3,995.0 3,995.0 4,075.0 4,050.0 4,050.0 4,080.0 Real effective exchange rate (2010=100) 104.9 105.4 109.9 112.1 113.5 115.5 117.8 (% change yoy) 4.9 0.5 4.3 2.0 1.3 1.7 2.0 Memo: Nominal GDP (US$ million) 12,891 14,188 15,362 16,600 18,381 19,409 22,388 Sources: Cambodian authorities and World Bank staff estimates e = estimate f = forecast p = projection 1/ Garments 2/ Excluding official transfers. Cambodia Economic Update April 2015 >> 23