The International Monetary Fund ( IMF ) is urging Cambodia to carry out structural reforms as it prepares to graduate from the United Nations’ least-developed country ( LDC ) status towards the end of 2029. 

“Structural reforms are critical to strengthen Cambodia’s growth model and resilience,” reads a statement, released as the IMF winds up a two-week annual mission to the country concluding on Wednesday.

“Priorities include improving the business climate, strengthening governance and the rule of law, enhancing skills and labour market absorption, supporting export diversification and attracting higher-quality investment.

“Improved energy security and efficiency, greater climate resilience and reforms to support renewable energy would also improve competitiveness.”

Need for better data

Better availability, quality and timeliness of data – and information sharing between agencies – the IMF adds, “remain essential for making timely assessment of economic developments and well-informed policy decisions”. [Moreover,] “better data on labour markets, remittances, real estate, financial conditions and informal activity would strengthen risk monitoring and policy design.”

With inflation expected to average 5.6% this year, up from 2.5% last year, the IMF points out, “fiscal policy should cushion near-term shocks through temporary and targeted support, while preserving medium-term fiscal discipline.”

Headwinds, tailwinds

External risks include higher or more volatile energy prices, the economic impacts of the emerging El Niño, trade policy uncertainty and weaker tourism demand.

Domestically, the key risks identified by the fund are financial sector vulnerabilities, real estate weakness and asset quality deterioration.

On the plus side, exports and inflows of foreign direct investment have “remained strong”,  the IMF says, noting that the “broadly stable” exchange rate “continues to serve as the nominal anchor in Cambodia’s highly dollarized economy”. 

Resilience amid shocks

“Cambodia’s economy has shown resilience in the face of successive shocks, but growth has weakened”, the IMF notes, with GDP expected to expand by 3% this year, down from 5.3% last year.

“Higher energy prices, softer external demand and reputational damage associated with scam activities,” the fund points out, “weigh on economic activity and weaken tourism and pose risks to financial stability.”

On financial stability, the statement notes that the end of broad regulatory forbearance was an “important step”.

Real estate vulnerable

However, real estate remains a “key vulnerability”, the IMF shares, given its interconnectedness to balance sheets of households, banks, developers and related businesses.

The “early supervisory intervention” by the National Bank of Cambodia is welcomed by the fund, which urges the central bank “to continue to ensure timely recognition of losses and adequate provisioning.”

“Crisis management and bank resolution frameworks” it adds, “should be fully operationalized, with emergency liquidity assistance available only to solvent institutions and with appropriate safeguards.”

Decisive steps urged

Financial integrity risks, the IMF shares, should be “decisively” addressed. “Improved understanding of risks, stronger inter-agency coordination and international cooperation would help further strengthen licensing frameworks, governance supervision and enforcement,” it says. “This will be important to enhance confidence among depositors and investors, and ensure the integrity and stability of the financial system as a whole.”

With rapid economic growth in recent decades, Cambodia met the UN’s three LDC graduation criteria involving income per capita, human assets and economic vulnerability in 2021 and again – with significant margins – in 2024.

Graduation from LDC status in 2029 is expected to result in the withdrawal of international support, such as preferential trade arrangements as well as flexible applications of the World Trade Organization’s rules of origin and trade-related aspects of intellectual property rights.