Where is Cambodia’s exit strategy that can save the economy?

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Some 256 garment factories have suspended operations, affecting over 130,000 workers. Heng Chivoan

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.

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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.

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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 $100 million in tax on the items.

Considering this, would tax exemptions for hard-hit businesses continue? “We are not sure [of extending further] as it is valid in July. We will assess again and see what we need to do again,” Phalla said.

Also uncertain is the continuation of several other measures such as the suspension of the National Social Security Fund payments and tourism licence renewal fees, delay of the seniority payment for 2020, and injecting liquidity in banks and financial institutions to support outstanding loan restructure and low-interest loan provision.

‘. . . tourism businesses going bankrupt’

Compared to the region, neighbouring countries Myanmar, Thailand and Malaysia have already rolled out their recovery plans for the next two to three years.

Malaysia has outlined 40 initiatives in its 35 billion ringgit ($8.2 billion) post Covid-19 fiscal stimulus budget to help economic sectors including small- and medium-sized enterprises and citizens while Thailand has passed a 1.9 trillion baht ($61 billion) budget to do the same and more.

So, what about Cambodia? Over the months, demands have been made by business communities to keep the measures sway until the global situation improves.

A call by the Cambodia Hotel Association (CHA) to the government involves a longer tax holiday, 25 per cent reduction on electricity tariff and removal of tourism tax.

“A lot of tourism businesses are going bankrupt. The sector is still in a bad way although there has been a slight increase from domestic tourism. But this is not contributing much to our economy.

“We want the government to help us survive past Covid-19 so that we can continue to operate when all this is over,” said Clais Chenda, president of CHA.

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To be fair, the government has responded to some industry pleas, such as those the Garment Manufacturers Association of Cambodia (GMAC), which scored a few nuggets including the exemption of not paying damages or prior notice payments to workers for businesses that closed due to the pandemic. Now, it wants the government to suspend negotiations on the minimum wage revision.

But these actions mean the government is going to be saddled by the burden that befalls workers who have not only become unemployed but might find difficulty securing jobs soon in the current economic climate.

Some guidance can be found in Cambodia’s glossy forward-looking strategies such as its Industrial Development Policy, and National Strategic Development Plan but weak governance and coordination has stymied efforts to deliver the manufacturing sector from a labour-intensive industry.

“The government has this handy document [NSDP 2019-2023] which can be referred to to re-allocate some urgent priorities and additional plans,” said local entrepreneur D Van.

However, he opined that the documents like many which can be found in third world countries, have flawless attributes and remain as technical documents. There are a lot of jargons, motherhood-statements, ambiguous generalities and past year data.

“[But] the challenges at hand are unique, comprising structural and external environment. [are not properly addressed]. That is why we want to hear what the government has in store for the economy post-Covid-19,” he said.

Van said for the plan to succeed there has to be a proper concept that creates an ecosystem for priority sectors and space for a participative mindset.