Feeling the burn: Cambodia keels on slow-to-act attitude

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The garment sector has been relying on raw material supply such as zips and buttons from China, which ran into shortage earlier this year, causing a halt in production. Post staff

Had the Industrial Development Policy (IDP) been put to work, the economic impact might have been less painful, having climbed the value chain and workers up-skilled

In 2015, when the Cambodian Industrial Development Policy 2015-2025 (IDP) was introduced, the manufacturing industry was characterised as having a narrow industrial base which focussed on garment and food processing industries.

It was missing a middle and informal industrial structure, possessed a weak and urban-centred entrepreneurship, a low value-add and low level of technology application.

Most of the production activities were family-based with lack of entrepreneurship and inadequate use of technology, thus limiting their ability to compete in international markets.

Enter the policy to transform and modernise the industrial structure to a skills-driven industry by 2025 from a labour intensive one via various methods, including connecting to regional and global value chains, and building a technology-driven and knowledge-based sector.

The realisation of this vision would contribute to national economic development, sustainable and inclusive high economic growth, create employment, increase economic value-add and a higher income for Cambodians.

By all accounts, the document, which has its foundation in the third Rectangular Strategy, is a wholesome policy that advocated a dynamic transformation using precise strategies.

Five years down the road and reaching the midterm, little action has taken place.

Cambodia faltered at the beginning itself, despite the watertight recommendations. This was due to a lack of readiness and good coordination between stakeholders, including the private sector, said Ministry of Economy and Finance spokesman Meas Soksensan.

The consequence of that is a manufacturing sector that remains largely labour intensive, and now with Covid-19 wreaking havoc in the economy, efforts have slowed if not stopped entirely.

This has roughly wiped out $2 billion to $3 billion worth of garment and footwear exports as of May 31, 2020, due to the pandemic and global recession, said economist Chheng Kimlong. He added that nearly $300 million in revenue for the government has likely been lost.

And it correlates with the comparatively lower growth of 7.5 per cent in the first quarter of 2020 (1Q20) versus 17.7 per cent growth in the same period in 2019, said World Bank in its latest economic update.

The focus in a single sector was specifically what IDP aimed to avoid.

As of February 2020, the export of garment, footwear, and travel goods consisted of 1,087 factories which employed 941,000 workers. Last year, the segment contributed 17 per cent of real gross domestic growth.

“The government relied on a few growth drivers that have become almost saturated. Only in the past couple of years has it begun to embrace targeted economic diversification toward higher-end growth sectors while maintaining growth over existing ones,” said Kimlong who is also the director of the Centre for Governance Innovation and Democracy at independent think-tank Asian Vision Institute (AVI).

Although the development of the IDP and the recent creation of the SME Bank aim to promote private sector development, the implementation and scalability of these two policies have yet to materialise.

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Sinking into complacency

Old-timers recall that when the Council for Development of Cambodia (CDC) was formed in 1994, a year after the Kingdom’s first general election, blazing measures were identified to move up the value chain to ensure that the labour-intensive phase does not last more than 12 years, at most.

“But now, 25 years later, we are still stuck with the same sunset industry that is the garment. The future of this industry is highly uncertain.

“[With Covid-19] the short term pain [threatens] to eventually destroy the sustainability of garment manufacturing as one of the mainstreams of our economy,” said David Van, a senior associate of Platform Impact, a public-private partnership.

Decades of heavy reliance on the garment and footwear sectors with the safety net of preferential schemes - EBA and the US’ General System of Preferences – is no longer feasible, particularly the former which is expected to be partially withdrawn in August.

But these were the beliefs which critics allege led the government to sink into complacency, seeking solace from the fact that Cambodia was a least developed country, a notion ministry spokesman Sokensensan dismissed.

This is moot. Seeing how Cambodia could have saved millions of dollars instead of reeling from the shortage of raw materials had it climbed the value chain from its present cut-make-pack model to manufacture zips and buttons for its garment industry, instead of relying on Chinese firms for raw material supply.

The sector now recoils along with two other economic drivers – tourism and construction – putting at least 1.8 million jobs or 20 per cent of total employment at risk, the World Bank said.

To date, some 150,000 unskilled workers have been suspended after180 garment and footwear factories have ground to a halt on lower orders and raw material supplies.

In line with that, poverty is forecast to increase between one and five percentage points from a 50 per cent income loss that lasts for three months for households involved in the growth sectors, or between three and 11 percentage points if income loss extends to six months.

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The bank foresees gross domestic product (GDP) to shrink between minus one per cent (baseline) and minus 2.9 per cent (downside) on the back of Covid-19, rendering it the slowest expansion since 1994.

The formal garment sector is the main source of government revenue in the form of export tax, which is construed as direct revenue. The sector comes in third in terms of contribution to real economic growth, providing about 17 per cent of real GDP growth last year.

Foreign direct investment inflows, mostly into the construction sector, have originated from a small number of regional countries, especially China, the World Bank said.

Construction and the real estate sector bumped up revenue in recent years, representing more than a third of economic growth.

But revenue collection is expected to be significantly below the budget target in 2020, inevitably expanding overall fiscal deficit including grants to nine per cent of GDP this year from a surplus of 0.5 per cent in 2019.

In 2019, savings stood at 20.2 per cent of GDP or 22.2 trillion riel ($5.4 billion) after several years of accumulation. But this year, a shortfall is likely in domestic revenue.

“It might require the authorities to dip into government savings, while domestic financing needs are projected to amount to 5.3 per cent of GDP,” the World Bank said.

Signs of increased expenditure are evident where 3.8 trillion riel was spent in the first quarter ended March 31, 2020 (1Q20), which was 20.7 per cent more at 3.1 trillion riel from a year ago.

This, despite a higher income of 5.5 trillion riel compared to 5.1 trillion riel in the corresponding period in 2019.

Based on ministry data, some 1.7 trillion riel balance remained at the end of the quarter compared to 1.9 trillion riel in 1Q19.

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Exit strategy?

Here is where the slow roll-out of IDP, which includes skills training seen as indispensable to raising productivity and prohibiting the hiring of costly expertise from overseas, is criticised.

According to Van, the policy highlights certain “pioneering” sectors to be promoted by the government, but the public does not seem to see any specific efforts or measures.

“Had we started to aggressively and comprehensively promote those sectors, we might not be in the doldrums today with three major economic pillars collapsing,” he said.

It is hard to see a rapid recovery for garment exports and tourism, considering that many major buyers in the EU and US have filed for bankruptcy while large hotel outlets have opted for fire sales, coupled with the International Civil Aviation Organisation’s estimates that commercial flights might only resume pre-Covid-19 frequency by 2023.

“What is our exit strategy for the post-Covid-19 crises and how do we address and deal with the new normal because the old way of thinking and doing business is now obsolete?” Van asked.

No doubt, it is a concern behind every government’s mind.

AVI’s Kimlong opined that the economy will continue to suffer the blow from the global recession and deglobalisation due to the lingering effects of Covid-19.

“The garment, footwear and tourism sectors, including transportation and aviation, and the entire hospitality sector will be the biggest losers,” he said.

If a second wave crisis does not happen, Cambodia’s economy is expected to pick up to the pre-Covid-19 status by the middle of 2022 to early 2023.

In the meantime, Soksensan asserted that government efforts to diversify the economy have seen a shift, evidenced by the non-garment sector’s growth of 16.8 per cent year-on-year in 2019 from 5.8 per cent in 2018.

“The shift was just starting. Unfortunately, Covid-19 will be an obstacle to its progress. Our economy will be badly affected. We hope to recover in 2021 ... our readiness for a new economic platform will be better and stronger,” stressed Soksensan.