IMF Says Cambodian Economy to Grow 6.5%, But Warns of Risks

Phnom Penh (dpa) – Cambodia’s economy is expected to grow 6.5 per cent in 2012, up from 5.75 per cent last year, the International Monetary Fund said in its annual review, adding that government policies to boost the investment climate were paying off.

However, in its assessment, which was released overnight, the US-based body warned the kingdom’s economy was vulnerable to the global slowdown, adding that its narrow export base made it susceptible to “significant downside risks.”

Cambodia’s economy is based on agriculture, garment manufacturing, tourism and construction, with the last three helping to buoy the economy last year. The garment industry was the largest foreign exchange earner in 2011 worth 3.75 billion dollars in exports.

“If you look at the report there has been quite a bit of progress on several fronts and that progress needs to be continued,” IMF country director Faisal Ahmed told dpa Tuesday, adding that one key area needing attention was the financial sector.

The IMF assessment called again for a moratorium on banking licences – more than 30 banks now operate in Cambodia, making it “overbanked” – until the central bank has sufficient capacity to regulate the sector.

“The current degree of concentration and fragmentation poses risks to financial stability, while not delivering sufficient benefits from competition and innovation,” the report stated.

Stagnant tax revenues combined with increased spending following 2011’s floods had cut the government’s deposits to around 4 per cent of GDP, leaving it with limited room to tackle future challenges.

The IMF recommended the government boost efforts to increase the tax take and raise spending on infrastructure and high impact social programmes. Further improvements to the business environment would also reap rewards, contributing to an expectation of 7.6-per-cent growth over the medium-term.

The IMF again cautioned that guarantees to firms involved in build-operate-transfer power projects, particularly hydroelectric dams, could generate “potentially large contingent liabilities.”

The high cost and poor reliability of the electricity supply has long proven a brake on inward investment, which is why the government has signed deals for dozens of projects over the next decade. However it has also guaranteed to buy all of the electricity generated by at least some of those projects.

Although the risk posed by that guarantee might not seem significant given the current shortage of electricity, the IMF said, “the sheer size of these projects, and the fact that risks for complex infrastructure projects are difficult to quantify ex ante, call for continuous and careful monitoring.” dpa rmc ses Author: Robert Carmichael