In the face of global economic fragility, the Cambodian government needs to review its fiscal policies and deepen its pockets – building a “buffer” for use in times of crisis, the World Bank has warned.

The World Bank’s Global Economic Prospects 2015 report states that Cambodia should install fiscal measures to improve taxation and reduce debt levels without impinging on the Kingdom’s above 7 per cent annual growth.

“Building policy buffers is especially important in Cambodia, Lao PDR, Mongolia, and Vietnam, where fiscal deficits are in excess of 5 per cent of gross domestic product,” the report says.

The bank warned that intensifying geopolitical tensions, receding market liquidity and declining revenues for oil-producing nations meant richer economies remained fragile. Slower-than-expected growth in trade and rising costs of borrowing for developing nations could exacerbate debt levels.

Cambodia’s account deficit, which has risen annually since the global financial crisis in 2009, is equal to 11 per cent of the country’s $15 billion GDP, according to the World Bank report.

“Cambodia was successful in using its buffer to increase public spending and stimulate the economy to recover from the shock of the global financial crisis in 2009,” World Bank Cambodia’s senior country economist Enrique Aldaz-Carroll said.

“It has been rebuilding its buffer since, but the level of its buffer relative to GDP has not yet recovered to the pre-crisis level. It would therefore be in Cambodia’s interest to increase its buffer during favourable times.”

The World Bank report called on developing nations to utilise the current oil-price decline, which is expected to spur income shifts to oil-importing countries like Cambodia, as a window of opportunity for the government to improve its financial position.

“The sharp decline in oil prices means that policymakers could implement subsidy and tax reforms to help rebuild fiscal space or finance better – targeted pro – poor policies while removing distortions that hinder activity,” the report reads.

International Monetary Fund resident representative for Cambodia Faisal Ahmed was optimistic that the Cambodian government’s revenue collection efforts could provide some cushion to external shocks.

“The government’s recently adopted Revenue Mobilisation Strategy can help raise revenue by improving revenue administration, implementing fair and efficient tax policies, and strengthening governance,” Ahmed said. “The additional resources can finance Cambodia’s development needs in priority sectors such as education and health while building additional fiscal buffers to cope.”

The General Department of Taxation and the Department of Customs and Excise this week reported the government had raised $2.4 billion in taxes in 2014, up from $1.9 billion collected in 2013.

But not all economists are convinced that Cambodia has the tools to substantially improve its financial position in the short term.

“I think both the lack of fiscal instruments and the limited capacity to collect taxes and other government revenues will limit Cambodia’s ability to build up buffers during upturns in the business cycle,” Jayant Menon, lead economist in trade and regional cooperation for the Asian Development Bank said.

“These are long-term challenges that need to be overcome before short-term stabilisers can work. All transition economies are burdened by this, not just Cambodia.”

Despite concerns over the cost future lending, Grant Knuckey, CEO of ANZ Royal, said Cambodia’s relationship with China and Japan stands as a fiscal buffer in itself.

“Cambodia is fortunate to have the support of concessional lenders such as China and Japan to make balancing these divergent priorities a bit easier,” Knuckey said.

“The real challenge for Cambodia will be about increasing the tax base in a way that does not disincentivise business activity,” he added.

“On balance, that need is more critical than the fiscal deficit.”