Where is Cambodia’s exit strategy that can save the economy?
With the prospect of being slammed by a double whammy, the government is working on an economic recovery plan to deliver it from Covid-19 and the EU’s partial withdrawal of the Everything But Arms scheme in the next two to three years
CAMBODIA is in the process of devising its post-Covid-19 economic recovery plan just as the infection rate inched up to 141 following a 40-day hiatus, in what is now seen as the second phase.
Globally, 10.8 million cases have been reported along with 6.03 million recoveries and 519,050 fatalities.
A few reports say the rate of transmission has stabilised in some parts of the world while experts in Italy have concluded that the virus mutation that country is becoming less virulent. However, details are still moot.
What is certain though is the overall cognisance by analysts that the global economy is expected to pick up in the second half of the year.
But in Cambodia, the path is less clear, particularly plans for two of its key growth sectors – tourism and export manufacturing – which were nearly decimated by Covid-19. Official data shows that some 256 factories have suspended operations while 169 enterprises in the tourism sector have closed shop. Together, more than 150,000 workers in these industries have become jobless or face paycuts.
Over the months, a series of monetary and fiscal measures were implemented by the central bank and government but rumblings are becoming prominent in the business community over where the strategies to get past the gloomy economic landscape are.
This year, gross domestic product (GDP) is forecast to contract to -1.9 per cent, compounded by an exacerbation anticipated with the partial withdrawal of the EU’s Everything but Arms (EBA) scheme.
To top that, a shortfall in the revenue base comprising exports and construction would move the authorities to dip into the national savings of 22.2 trillion riel ($5.4 billion) as of December 31, 2019, the World Bank said. It expects domestic financing need to amount to about five percent of GDP.
The plunging revenue this year could result in an overall fiscal deficit including grants widening to nine per cent of GDP – down from a surplus of 0.5 per cent last year. However, given the authorities’ liquidity (savings), recourse to domestic (central bank) financing to fill the widening overall fiscal deficit is not expected, World Bank said.
Having said that, it does not dismiss any notion that Cambodia might borrow to finance the exit plan as income falls.
In addition, foreign direct investment is projected to fall while mainland China, its largest investor at 40 per cent in 2019, gets back on its feet to continue supporting Cambodia’s real estate and construction sectors.
Put together, all these will drive a decline in foreign reserves to $16.8 billion, representing 6.8 months of prospective imports in 2020, compared to $18.7 billion last year.
It will be a tough transition for the country in the coming months, which is why Cambodia should make haste with the recovery plan.
Up to now, some $1 billion out of a maximum of $2 billion allocation has been expended in four stages of the Covid-19 measures via cash outlays for the poor and unemployed, purchase of medical equipment and cross-sector tax exemptions.
Two weeks ago, the government announced budget cuts for its institutions and sectors. It said capital expenses in the economic sector will likely slip, making up only 6.4 per cent of
GDP in 2021, down by 5.3 per cent compared to this year.
These expenses will be used to diversify the economy, increase competitiveness in the private sector and attract public investment.
Of the cuts, public administration expenses will be sliced to 6.4 per cent in 2021 or only two per cent of GDP as opposed to the 2020 budget.
This means that financial bonuses including 50,000 riel ($12.5), dished out twice to public officials during Khmer New Year and Pchum Ben Festival, will be held back in 2021.
According to the Ministry of Economy and Finance secretary of state Phan Phalla, measures to fortify the recovery plan are proving to be a challenge as the ministerial team works `day and night’ to release it.
“It is not easy [because] we have to listen to all stakeholders on how we can recover to move forward. It is taking some time to formulate,” he explained.
There is a lot at stake, particularly when funds are short and an outstanding loan of $7.6 billion as of December 31, 2019, hovers in the background. Outstanding loans are projected to expand to $8.4 billion in 2020.
However, there is neither a plan to seek to restructure the loans borrowed from bilateral and multilateral partners nor appeal for a moratorium on debt repayment, said ministry spokesman Meas Soksensan. This year, the government is expected to meet its debt service payment of $404.4 million.
Will the tax holiday remain?
In March, the government waived taxes for affected parties in the garment and footwear, and tourism sectors till May before being extended to July.
While this was a positive move for businesses, it would affect this year’s revenue target after rising to a whopping 27.8 trillion riel including grants last year. Of course, it was underpinned by taxes on goods and services, consisting mainly of the value-added and excise taxes from domestic businesses and imports.
In the first five months of this year, some $1.3 billion in tax revenue was collected but critics are sceptical if it can hit beyond $2 billion this year. Last year, overall tax revenue stood at $2.2 billion.
The scepticism is also due to the possible partial withdrawal of some 20 per cent tariff on Cambodian exports, valued at around $1.1 billion, commencing in August.
With more than 40 per cent of its revenue-generating products such as garments, travel bags, and sportswear hit, Cambodia might have to absorb