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Economic measures mounted to recover from Covid-19 and boost private funding

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Export of bicycles and other non-garment goods rose more than traditional exports in the first half of this year. Heng Chivoan

Economic measures mounted to recover from Covid-19 and boost private funding

Detailed strategies and mechanisms on vaccination, financing methods, cash outlays and market competitiveness are in place to aid the economy

In the past year and a half, the Covid-19 pandemic has exposed global economies to risks, negatively affecting private sector profitability and people’s income, resulting in a downward pressure on domestic revenue collection.

“It is a global phenomenon where each government has to shoulder a heavier responsibility of supporting business lifelines and people’s welfare, and Cambodia is no different,” said Ministry of Economy and Finance (MEF) spokesman Meas Soksensan.

“However, the remarkable journey of peace, macroeconomic stability and high economic growth for many years have provided a favourable condition for Cambodia to accumulate a bigger fiscal space.

“It is also thanks to the government’s concerted efforts, especially the successful implementation of the revenue mobilisation strategy,” Soksensan said in an interview with The Post in response to UN Development Programme (UNDP)’s latest Development Finance Assessment.

Published in July, the report analysed public, private, international and national financing flows available to support investment in the country.

Revealing its findings, it offered medium-term policy recommendations for MEF to maximise the level of flows, and their quality and allocation, in order to achieve long-run development objectives.

In light of Covid-19 and its serious financing impacts, UNDP also estimated Cambodia’s total financing flow losses to be $3.6 billion as private funding comprising foreign direct investment (FDI), domestic revenue and investment, took a beating.

Within that context, the economic fallout this year is likely to be big, pushing above $300 million due to reduced business activities in the last six months, according to economist Dr Chheng Kimlong’s previous estimates, in the absence of official data.

Echoing the impact on private funding, Kimlong, who is vice president of independent think tank Asian Vision Institute, said expenditure on public infrastructure however has not been curtailed.

While it is unlikely that the government will inject funds into the private sector using national budget, it might instead mobilise funds from different sources.

“[It could be] from private financial institutions [by] using the money [that is] sitting idly, multilateral institutions and other governments. [This method] can gain momentum and has the potential of addressing domestic budget and financing constraints,” Kimlong opined.

In the meantime, more business closures or reduced activities are likely to kick in on the back of widespread infections in the world, including the Southeast Asian region.

“So far, the continued expansion of budget expenditure on Covid-19 containment and social security support [amid] reduced national revenues has put pressure on the nation’s capabilities to meet the national sustainable development goals,” he told The Post.

Better revenue collection

Given that sovereign funds have come under pressure due to the government’s emergency intervention programmes to help vulnerable business sectors and communities, the UNDP report which outlined near-term policy response noted that it is imperative to seek financing solutions to meet the growing budget deficits in 2020 and 2021.

That being said, budget deficit has been contained below international financial institution (IFI) policy target of five percent of gross domestic product (GDP), UNDP wrote.

“The government runs a small surplus on the primary fiscal balance to finance small capital works. Major capital works continued to be financed by IFIs and bilateral lending since Cambodia lacks any formal borrowing instruments,” it said.

As a result, the public debt stock remains comparatively low at 28.2 percent of GDP as of 2019, which is beneath the 55 per cent Debt Sustainability Analysis threshold, providing considerable room for additional borrowing.

This, Soksensan pointed out, showed that the public debt is sustainable and low risk, and that it is “cautiously managed” to ensure fiscal sustainability.

“Bearing in mind the challenges faced by businesses and people, Cambodia is doing its best to balance between maintaining a momentum in revenue collection and implementing various stimulus packages to help keep businesses afloat and people’s livelihood [going], especially the poor and vulnerable while working hard to identify and attract new and sustainable financing sources to meet our increasing needs,” he said.

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He added that among other factors, vaccination is key to bring the economy back on track, where the government is making efforts in effective containment measures and vaccine rollout.

More importantly, in 2021, the global economy is expected to recover gradually, especially Cambodia’s trading partners including the US, Europe, China and Asia.

“[In relation to that] Cambodia’s economic growth [will also] have a gradual recovery, which is mainly attributed to a recovery in key sectors – agriculture, non-garment manufacturing, transport and communication. Thus, revenue collection is estimated to be better than expected,” he said.

Economic recovery plan

Along with the gradual recovery of global economy which will support Cambodia’s recovery, the government is preparing to launch the Economic Recovery Plan 2021-2023 (ERP).

While no timeframe has been cited yet, the plan will focus on recovery, reform and resilience to boost economic recovery, promote competitiveness and build a resilient foundation for social and economic development.

Soksensan mentioned that the plan mobilises various financing support mechanisms including traditional financing sources.

“Development partners are expected to take part in this financing. Some are [already] playing that role. And, given our low level of public debt, there is additional room to borrow to finance this recovery plan,” he said.

In addition, a principle in the Public Debt Management Strategy 2019-2023 states that the government can “use loans to finance public infrastructure investment projects with high standard and quality based on the public investment management principles”.

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These loans can be used in response to national development demands in a new scenario, such as to ensure economic, social and environmental sustainability, and resilience to climate change effects.

But some stimulus measures to help with economic recovery have already been implemented such as the establishment of SME Bank of Cambodia Plc and a $200 million credit guarantee scheme to aid small and medium-sized enterprises.

There are more intervention packages within the ERP that will be implemented in future, he assured.

Asked if Cambodia can assume the role played by foreign investors to finance local projects, Soksensan contended that Cambodia is a dollarised economy with an open capital account and that foreign funding has been a significant source of financing development needs.

But, Cambodia is working on the strategic measures to develop a government securities market in the near future to mobilise domestic financial resources for development.

In addition, a public private partnership mechanism which is “another critical and strategic tool” to attract domestic private financing for large scale investments and funding has been put in place.

Rising beyond LDC status

In time, official development assistance (ODA) in the form of concessional loans or grants will reduce as Cambodia graduates from least developed country (LDC) status.

This year, Cambodia met all three criteria - per capita gross national income (GNI), a human assets index and an economic vulnerability index – for LDC graduation for the first time in the Triennial Review conducted by UN body Committee for Development Policy (CDP).

It failed to meet the GNI and economic vulnerability index thresholds in 2018. However, to be eligible for graduation, it has to satisfy the requirements again when the review re-convenes in 2024.

If Cambodia is eligible for graduation in 2024, the CDP will recommend it to the UN Economic and Social Council for endorsement, and there on to the UN General Assembly which will confirm a length of a preparatory period.

Cambodia will remain there until the graduation is effective. Once Cambodia is no longer an LDC, it will be given a “transition period”, which spans between three and five years.

During the transition period, Cambodia is still eligible for all associated benefits that the LDC countries are entitled, which includes preferential treatments, concessional loans and grants, Soksensan said.

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“Indeed, Cambodia has thoroughly understood the outcomes of post-graduation of LDC as the ODA will be gradually reduced. Moreover, due to the pandemic, it may prolong the process of expected LDC-graduation for Cambodia.

“Therefore, while [we have] a strategic plan to graduate from LDC status, [we] perceive it as an opportunity to strengthen [our] domestic financing, especially the securities market,” he shared.

The Kingdom is also strengthening its competitive position through continuous reforms, strategies and policies to promote a favourable business environment to attract new investors.

These include amending the Law on Investment, improving the ease of doing business, and expanding the export market through trade agreements, for example the Chinese and Korean free trade agreements and the Regional Comprehensive Economic Partnership.

Soksensan said efforts are being made to build a resilient foundation for the economy and society, particularly to enhance skills development and productivity, SME-promotions, trade facilitation, infrastructure development, inclusive social protection and digitalisation.

“On macroeconomic and fiscal development of the country, Cambodia always does a comprehensive research to assess its economy, study other countries’ experiences carefully and consult with stakeholders before making any strategic move,” he added.

‘Recovery, reform, resilience’

Considered the third wave beginning February 20 this year, the economic fallout flowing from that has been closely monitored by the ministry, he said.

In the midst, economic growth has been revised down to 2.5 per cent in 2021 from four per cent predicted earlier this year.

Despite the lower growth projection, the outlook seems positive mainly due to the promising growth of agriculture, non-garment exports, and transport and communication sectors.

“Given the uncertainty of the rapid development of the outbreak, it is early to conclude the impacts of the February 20 event on the economy.

“However, data for the first six months of 2021 [showed that] Cambodia maintained a positive export [growth] excluding gold worth $7.4 billion, up 14.6 per cent year-on-year. It was driven by agricultural products and non-garment products including bicycles, electrical parts, insulated wires, vehicle spare parts, plywood and other industrial products,” Soksensan said.

He added that even with the severe impact on the tourism sector, observations revealed that economic activities had started to resume gradually in the post-lockdown period.

“The government has taken necessary measures to protect people and manage the situation, particularly by working very hard to vaccinate people in the targeted areas [under] the ‘Blossom Approach’ and ‘Strategic Plan for Covid-19 Vaccination Campaign to Build Socio- economic Resilience in Cambodia by 2021’,” he mentioned.

As of July 21, 63 per cent of the targeted 10 million people had been vaccinated, Soksensan said, noting that the economic prospect in 2021 is expected to be better than 2020 because of the government’s ongoing policies.

“These include the priority on vaccination against Covid-19 because pandemic and vaccine policy is an economic policy, maintaining the lifeline of the people, especially the poor and the unemployed, and keeping business activities of the affected sectors afloat.

“[We will also] promote domestic economic activities as clearly witnessed through the nine rounds of government’s intervention packages, maintain security and social stability, and launch the ERP which focusses on recovery, reform and resilience,” he added.

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