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Leading Edge: IMF puts emphasis on the positive

The International Monetary Fund’s senior economist and Cambodia chief of mission Olaf Unteroberdoerster sat down with reporter Ngoun Sovan to talk about the outlook for the Kingdom’s economy and the banking sector during the IMF-World Bank annual meeting in Washington DC, held from October 8-10.

So how is Cambodia’s economy doing this year?
We [the IMF] project real GDP growth to reach 4.8 percent in 2010, a significant turnaround from 2009. We see that a broadening export-led recovery has been taking hold since the beginning of the year. Garment exports and tourist arrivals, notably by air, are bouncing back, both growing between 10 to 20 percent year-on-year in the second quarter of 2010.

Construction activity, however, appears to remain sluggish with growth of most related imports still negative, while a late start of the rainy season may dent agricultural output growth.

In line with the economic recovery, headline inflation is expected to increase from last year and average about 4 percent this year.

FDI activity has turned the corner, and based on current trends would increase about 20 percent over 2009. However, as the excess from a pre-crisis construction boom is being unwound, FDI is expected to remain below its 2008 peak level for a couple of years.

What do the IMF’s projections look like for next year?
For 2011 and over the medium-term, we expect growth to gradually return to about 6-7 percent, while inflation would remain stable at about 3 percent, broadly in line with trading partner countries. However, achieving Cambodia’s growth potential, in our view, will very much depend on efforts to strengthen the business environment and enhance public sector revenues and service delivery.

On the other hand, a better-than-expected return to medium-term investments in the power sector and rural infrastructure could offer significant upside potential.

What is the pace of economic development in Cambodia compared to fellow ASEAN member countries?
Cambodia enjoyed the highest growth rate of any low-income country in Asia during 2000-07. But then it was hit hard by the global crisis due to longstanding structural vulnerabilities, including a narrow export base and an underdeveloped financial system.

What are your key recommendations for the development of Cambodia’s economy in coming years?
In our annual consultation with the Royal Government of Cambodia, which was just held a few weeks ago, discussions focused on the dual policy challenge to safeguard hard-won gains in macroeconomic stability and policy credibility, and lay the foundations for broader-based and inclusive growth.

Fiscal policies will play a key role in this regard. We were encouraged by the fiscal outturn through July suggesting that the budget target of a gradual fiscal consolidation is on track. However, we think that further fiscal adjustments are needed for 2011 and the medium term.

As the economic recovery gains traction, the recourse to domestic financing, and thus the injection of significant additional riel liquidity should be eliminated to avoid undue external and inflation pressures. Moreover, further consolidation would enable Cambodia to retain its favourable debt sustainability outlook and rebuild its capacity to absorb potential future shocks.

How can the Cambodian government continue to improve its finances?
We strongly support the government’s emphasis on further improving revenue administration. Gains in tax collection offer the best hope for Cambodia to meet the dual objective of securing fiscal sustainability and mobilising resources for its development needs.

In addition, further progress along the government’s public financial management reform program will be critical to secure gains from enhanced revenue administration and improve the effectiveness of social priority spending.

Cambodia is set to have 30 commercial banks by the year’s end. What have you observed about the situation of banking in Cambodia this year?
In our recent visit we recommended the National Bank of Cambodia for taking actions to safeguard the health of the banking system. We were also encouraged by the broad agreement during the discussions on the findings of the IMF-World Bank Financial Sector Assessment Program mission in March 2010 and on the understanding that robust supervision of banks and strict enforcement of prudential regulations, including on the new minimum capital requirements, remain key to sustained stability.

However, it is also clear that the supervisory framework and resources will also need to keep pace with the development of a broader financial system, that, at some point the future, may also include a stock market.

With a bettering economic situation this year, some bankers expect profits to climb as bank lending increases – is this a view you share?
Amid ample liquidity in the banking system, credit growth has turned the corner and, on current trends, we believe it could run well above 20 percent in the second half of the year.

For the banks, the economic recovery is an opportunity to clean up balance sheets and address potential vulnerabilities that emerged during the crisis, while further bolstering public confidence in the system.

What assistance is the IMF providing Cambodia this year, and what’s planned for 2011?
The IMF continues its intensive policy dialogue with the government. Moreover, Cambodia remains one of the major recipients of technical assistance from the IMF in the region, including in the areas of fiscal management, financial system stability, and macroeconomic statistics.

Our current representative is Milan Zavadjil, who is also the Senior Representative in Indonesia. He frequently visits Cambodia, and is supported there by our permanent local office staff.

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