Rising cases and deaths are pushing the Kingdom to shore up its repository to buy vaccines, aid vulnerable groups and hold the economy together but can it handle more debt?

The odds are stacked against Cambodia if the third and comparatively strongest wave of Covid-19 community transmission spirals out of control.

With the latest event, dubbed the “February 20 event” after the first communally transmitted case this year, the urgency to procure vaccines and fight the scourge of the pandemic has sparked the first round of concessional loans of $500 million this year.

The sum to be sought from bilateral and multilateral development partners kicks off Cambodia’s largest borrowing to date at $2.1 billion or 1.5 billion special drawing rights.

This total borrowing is about 20 per cent of the $8 billion 2021 national budget, representing 4.6 per cent of gross domestic product (GDP).

Despite the public debt augmentation, Ministry of Economy and Finance (MEF) stressed that it is within the debt threshold of 55 per cent of GDP.

“We are in process [of application] and it complies with the laws. Don’t worry, we would not go beyond the [threshold],” MEF spokesman Meas Soksensan assured.

He also reiterated that Cambodia received grants for vaccines from China and Australia, and is procuring some doses via World Health Organisation’s Covid-19 Vaccines Global Access (COVAX) Facility.

In March last year, the government allocated a maximum sum of $2 billion for the Covid-19 stimulus fund which was raised by rationalising the national budget, including cutbacks on official trips overseas, and public donation.

Eighty per cent of $1.2 billion for Covid-19 formed cash outlays for ID-poor households and unemployed garment and hospitality sector workers, as well as low-interest loans for small and medium enterprises.

There is the remainder of $800 million reserved for 2021, which does not include the tax exemption that was allowed for impacted sectors last year, Soksensan said.

“[This exemption] can be translated into millions of dollars [as it] will [be] resolved step by step. We are actively working on that,” he added.

The move seems to reflect the anxiety on the part of the government after the latest wave brought an otherwise recovering economy to a crawl.

While it undeniably evoked a sense of dread and gloom in the population because of its rapid infection rate in the capital city and other provinces, it also affected business and economic activities as people stayed indoors.

Observers expect the situation to worsen as movement control orders, provided for by the newly-passed Covid-19 law, are likely to be imposed if cases continue to rise.

Some provinces such as Sihanoukville and Siem Reap have already implemented travel restrictions to control the spread.

In effect, these directives, although necessary, will likely impact economic growth in the near-term.

According to economist Dr Chheng Kimlong in a recorded interview with Khmer news portal ThmeyThmey, some $250 to $280 million of state revenue has been lost due to the economic fallout since February 20, resulting in business closures and production and trade disruption.

His rough calculation is based on the wipe out of 40 to 50 per cent of monthly revenue collection since last month.

“It is a humble estimate,” he later clarified to The Post. “[But] if this [transmission]is not effectively controlled, and [persists] into the next few months or longer, losses in state revenue could be more than $300 million.”

He said the government has used its savings from previous years’ economic gains, foreign aid from bilateral and multilateral sources, as well as donations from the private individuals or foundations.

External borrowings, to some extent, might not be ruled out or overlooked, depending on the level of attractiveness over interest rates,he noted.

“All in all, the current budget deficits have to be financed to fulfill the needs of current and capital expenditures, particularly the expenditure on Covid-19,” Kimlong said.

Based on MEF data, budget deficit is forecast to widen to nearly 10 per cent of GDP in 2021, possibly the largest gap in 20 years.

Last November, the World Bank narrowed its fiscal deficit projection to 5.6 per cent of GDP for 2020 from an initial nine per cent estimate in May that year.

For 2021, a 32.1 trillion riel (about $8 billion) national budget or 27.1 per cent of GDP was declared.

Of that, operating expenditure or current expenditure would swallow up 18.8 trillion riel while 13.3 trillion riel has been set aside for capital expenditure.

Barring tax revenue, which only grew four per cent to $2.9 billion in 2020 compared to stronger growths in previous years, it was apparent that external funds were critical to supplement the budget through the pandemic.

As of March 25, 2021, Cambodia recorded 1,872 cases and seven fatalities, with 1,056 persons recovered.

Schools, entertainment outlets, and gyms remain shut while strictly guarded-quarantine centres and residential buildings, that were found to have recorded coronavirus cases, as well as testing centres and hospitals grew weary over time.

Still, it is too early to judge whether the impact on the economy is strong, said Soksensan, though he did not deny that there is a “certain impact”.

However, there is no “specific agenda” to modify the economic growth rate for the first half of 2021.

For now, GDP growth is predicted at 3.5 per cent in 2021 or around $30 billion after a record contraction of 3.1 per cent last year while inflation is likely to hit a five-year high of 3.1 per cent on the back of rising crude oil prices.

Current account deficit would marginally ease to 17.3 per cent from 17.6 per cent on the account of economic recovery.

In the meantime, measures to ease people’s financial burden remain in place with the loan repayment moratorium extended till June 30, 2021.

Housing developers have also been requested by the government to consider financial leniency by waiving penalties on customers until March next year.

With the sudden jolt in cases, the push to get vaccines in from producers is obvious as the government widens the inoculation programme to include factory workers and foreign diplomats.

But with a small fund to buy vaccines, including some $70 million donation from the public and friendly nations, Cambodia has to rely on doses via the COVAX Facility and the generosity of vaccine producers.

So far, 600,000 doses of state-owned China National Pharmaceutical Group Corp’s Sinopharm were donated while 324,000 Covishield doses, manufactured by AstraZeneca-licensed Serum Institute of India, came via the COVAX.

Another 300,000 Sinopharm doses and the remaining Covishield 770,000-odd doses (out of 1.1 million via COVAX)are expected by April.

To speed up the vaccination programme under present circumstances, Cambodia has also purchased 1.5 million CoronaVac doses from Beijing-based Sinovac Biotech Ltd, which will arrive this week.

It is unclear what the total value of the deal could be, as it would have been borne out of closed-door negotiations between both parties and the fact that vaccine prices varied nation to nation.

Though it should noted that based on Reuters reports found on Unicef’s Vaccine Market Dashboard, the cost for one CoronaVac dose in four countries ranged between $10.30 and $29.75, the top-end price found in China.

To give an idea of this deal’s purchase value, a back of the envelope calculation would show that the total value might have been around $15.5 million to $44.6 million.

In any case, the government’s vaccine procurement plan involves 11 million doses, seven million of which is being requested via COVAX.

It aims to vaccinate 10 million people, nearly two thirds of the population at some point, although this is dependent on the pace of delivery, which is beholden to a global supply pressure.

To date, the Bloomberg Covid-19 vaccine tracker showed that some 296,149 doses have been administered in Cambodia, which only makes up 0.9 per cent of the population, although 0.4 per cent are fully vaccinated.

With cases piling up, the race to get more vaccines while keeping the economy in check, is putting more stress on the balance sheet.

Plans to maintain tax revenue collection with no mercy on deadline extension for tax declaration indicates that this income segment cannot be compromised.

Therefore, it falls on external public funding to prop up the budget. That being said, foreign financing has been expanding in past years, although it dropped to $1.3 billion in 2019 from $1.8 billion in 2018.

For 2021, projected foreign funding of $2.1 billion is the record highest, following plans to raise $2 billion from international development partners in 2020.

It is not known what the total debt for the fiscal year 2020 is as official data is not yet available.

However, concessional loans for the first six months ended June 30, 2020 (6M20) stood at $479.1 million, down 5.1 per cent from $504.7 million in the corresponding period in 2019, MEF statistics revealed.

While Cambodia has made a total debt service payment of $1.8 billion between 1993 and June 30, 2020, its cumulative outstanding debt as of June 30, 2020 stood $7.9 billion.

Its present value of total public debt to GDP was 23 per cent, which accordingly is below the 55 per cent threshold.

It should, however, be mentioned that the loans are highly concessional with an average grant element of 56 per cent.

Nevertheless, in the past few months, international financial institutions have warned of an impending debt crisis as governments take on more borrowing to fund stimulus policies on the face of the pandemic.

It is no different with Cambodia. “The government may end up borrowing more than the amount it borrowed last year to finance current and capital expenditure,” said Kimlong, who is vice president of Asian Vision Institute, an independent think tank.

“It is normal that the [loan size] grows bigger every year.”

While it is necessary to fuel growth, the question is if Cambodia is heading towards a debt crisis, which Kimlong quickly dismissed.

“It is not up to the point of worry, as yet,” he said, although “it is hard to say exactly” when one should “start becoming concerned”.

The theoretical assumption of a debt threshold for a developing economy should be no more than 60 per cent of real GDP, he explained.

It can be slightly more, granted that debt servicing is faster or more credible.

“As Cambodian economy has graduated to lower middle income status, that threshold should be raised slightly. In 2019, [external] debt level was about 45 per cent of GDP,” he said.

What it essentially means is that it remains safe for Cambodia to continue borrowing from external sources until the time comes when it needs to pause and contemplate its next move.

“[And so] it is very unlikely that the country will run the risk of a debt crisis in the near future,” he mused.