With uncertainty hovering over the regional and global economies ushered in by the Covid-19 crisis amid surging commodity prices triggered by the Ukraine conflict, the International Monetary Fund (IMF) late last month downgraded its 2022 economic growth forecast for Cambodia to 5.1 per cent, from 5.6 per cent in February.
Alasdair Scott, the Washington-based development lender’s mission chief for Cambodia, discussed with The Post’s May Kunmakara the challenges, risks and opportunities for the Cambodian economy this year.
In October, the IMF had forecast that the Cambodia economy would grow around five per cent in 2022. Will you maintain this projection? Why or why not?
Our October 2021 forecast assumed that in 2022 foreign tourists would gradually come back and that demand for manufactured goods, particularly garments and footwear, would be strong. So far, if anything, tourism and exports of goods have been a bit stronger than we expected.
Since October we have also had unforeseen events. Inflation, particularly in fuel and food, has been higher than expected. The Chinese economy has slowed more. And there has been the conflict in Ukraine, which will slow growth in Europe in particular. These developments have the potential to have more adverse and persistent effects than what we are assuming.
However, given the strong start to the year, at this stage we think our projections for 2022 that we made in October still hold. As per our April 2022 World Economic Outlook (WEO), the growth projection for the year remains at just over five per cent, just as in the projection from October 2021.
What are the key sectors expected to drive Cambodian economic growth?
Manufacturing, particularly textiles garments and footwear, has traditionally been an engine of economic growth in Cambodia. Tourism and related services are another important component of gross domestic product (GDP).
During the decade preceding the pandemic, real estate and construction sector also witnessed a boom, with growth in the double digits accompanied by large domestic credit expansion among households and firms.
We expect these sectors to continue to be solid. Over the next few years, we expect manufacturing to take a larger share of GDP growth, with construction and real estate growing a little bit less strongly than in preceding years.
It will be important to diversify the economy to make it less vulnerable to fluctuations in any one sector or export market. Ultimately, sustaining increases in income will depends on education and raising skills.
What are the main challenges and risks for the upcoming months? Policy-wise, what does the IMF recommend for the local government to mitigate possible economic risks?
The most pressing challenges stem from global headwinds. Food and energy prices were already increasing. The conflict in Ukraine adds to those pressures and creates new uncertainty about consumer demand in Europe, one of the largest export markets for Cambodia. Recent lockdowns in key manufacturing and trade hubs in China will likely compound supply disruptions elsewhere.
Central banks may have to tighten financial conditions faster than previously expected, which will spillover to emerging market and developing economies.
Fortunately, Cambodia’s foreign exchange reserves are comfortable and should provide sufficient cushion against external shocks in the near term. That said, these global headwinds complicate policy-making in Cambodia – they make it harder to judge how much support is still needed for the economy.
The priority is still to protect the most vulnerable segments of the population. Targeted social support – such as through the cash transfer programme, which was extended in March – can shield the poorest against rising prices in crucial commodities.
Other support measures – such as measures to support credit and tax breaks – will have to be judged carefully, making sure that the economy is supported where needed but without using resources unwisely.
What’s the IMF’s view on the current Russia-Ukraine political crisis, as the after-effects of Covid-19 reverberate throughout the Cambodian economy? How will it affect the Kingdom?
As discussed in the April WEO, the conflict will contribute to a significant slowdown in global growth in 2022, along with worldwide spillovers through commodity markets, trade, and financial channels. The conflict adds pressures to growth and inflation while the global pandemic continues.
We see strong upward pressures on prices in Cambodia, particularly food and fuel, which account for most of household spending. We have revised our inflation projections up, to about five per cent for the year as a whole in 2022 and four per cent in 2023. This will imply extra cost pressures on producers, particularly in sectors which depend heavily on transportation, including manufacturing.
We have seen during the pandemic that exporters find it difficult to pass rising shipment costs on to foreign buyers – hence current developments will likely squeeze profit margins in the short run. It will also imply a loss of purchasing power for consumers, particularly those at lower incomes, whose spending is concentrated in food and fuel.
So far this year, export demand has been strong. In the short run, the priority is to safeguard vulnerable households with targeted fiscal support. The authorities should continue with their plans to make the economy vibrant and diversified, both in terms of export markets and by supporting growth in high value-added sectors.
Digital payments and financial inclusion have grown very rapidly in Cambodia, especially during the Covid era. Does the IMF have any plans to work with the central bank on development in the field?
Indeed, Cambodia has made great strides in the digital payments, including the Bakong payment system introduced by the National Bank of Cambodia. The IMF has been following the developments very closely.
The rapid changes in digital delivery have the potential to lower transactions costs and increase access to financial services, but we want to preserve financial integrity and ensure that consumers are protected.
We are working with the central bank to provide perspectives and lessons from other countries – for example, we recently ran a series of seminars on related topics such as fintech, digital payment and cryptocurrencies, which emphasised the importance of tackling data gaps and the need to prepare legal and supervisory frameworks for these new technologies.
We will continue to provide technical assistance on banking regulation, banking supervision, liquidity management, and financial stability to ensure the resilience of the financial sector, to mitigate risks and pave the way for the new payment services.
This interview has been edited for length and clarity.