Cambodia Debt Resolution

Start & End Date: 2021-2024

Country/Countries: Cambodia

Multilateral Institution(s) Involved: International Finance Corporation

The pandemic has exacerbated an unprecedented debt boom across EMDEs, with debt of all types rising to multidecade highs. Rising borrowing costs, combined with high debt levels and the rapid rise in non-concessional debt across many emerging markets and developing economies (EMDEs), increase the risk of financial stress. To finance Cambodia’s widening financing gap, the country’s public debt, which consists solely of external debt, rose quickly during the time of COVID-19 to 35 percent of GDP in 2021, up from 28.2 percent of GDP in 2019. Public debt owed to bilateral and multilateral creditors accounted for 69 percent and 31 percent, respectively. Looking forward, policymakers will need to balance macroeconomic support with bolstering fiscal sustainability. As EMDEs have limited policy space to provide additional support if needed, these downside risks heighten the possibility of a hard landing – a much sharper slowdown in growth than currently envisioned.

The project interventions are designed based on the current needs of Cambodia’s debt resolution , while also considering the strategic priorities of the WBG/IFC, and their expertise. Since financial and legal infrastructure for financial inclusion consists of many inter-linked elements, it is important that the recent reform momentum on credit reporting and secured transactions is supplemented by reforms on debt resolution and insolvency. The project plans to have the following components: 1. Design and promote non-binding principles for out of court workouts and improve debt collection standard and practice, and support creation of distressed assets market through building the essential servicing infrastructure; 2. Support the development of regulations governing the appointment and operations of insolvency administrators; 3. Training and capacity building for insolvency professional judges and administrators.

The expected result of the project is to strengthen the Cambodian debt resolution framework to provide efficient mechanisms for saving viable businesses, thereby preserving economic value, and for enabling orderly exits of non-viable businesses, thereby maximizing recovery rates. A quick resolution of bad debts supports financial sector efficiency, as well as promoting financial stability during economic downturns. Confidence in the debt recovery and insolvency proceeding procedures also particularly encourages credit growth for SMEs.