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Despite challenges, economy on right track with reforms

Garment exports to the EU were valued at over $5 billion in 2017, accounting for approximately 40 percent of Cambodia’s total exports. KT/Chor Sokunthea

Cambodia’s economy has shown a certain degree of resilience and tenacity in maintaining growth despite facing various political challenges from within and outside. Economic performance and output are the main sources of regime legitimacy.

The economic challenge is chiefly caused by the imposition of safeguards on rice exports from Cambodia to the EU, which added approximately 179 Euro (about $200) per tonne of rice, followed by the threat to revoke the Everything-but-Arms (EBA) duty-free access with the possibility of imposing 12 percent export tax on Cambodian garments and footwear to the EU market.

Garment and footwear exports to the EU were valued at $5.8 billion in 2017, accounting for approximately 40 percent of Cambodia’s total exports. The local economy gains $676 million annually from the EBA and if the suspension of the EBA by the EU kicks in, tariffs of up 12 percent on exports will be imposed.

Driven by garment exports and tourism, Cambodia’s economy has sustained an average growth rate of 7.7 percent between 1995 and 2018, making it among one of the fastest-growing economies in the world.

As global demand peaked in 2018, economic growth is estimated at 7.5 percent, compared to 7 percent in 2017 and is expected to remain robust over the medium term. The Asian Development Bank has forecasted that Cambodia’s GDP is expected to grow by 7.0 percent in 2019 and 6.8 percent in 2020, probably due to a technical correction and growing headwinds.

Cambodia’s GDP increased from $2.92 billion in 1995 to more than $24 billion in 2018. GDP per capita in 2018 had Increased to more than $1,500 compared with 1995 with $797 and is expected to exceed more than $1,700 this year.

Factors contributing to this upward trend, which has outperformed forecasts, are the restoration of peace and security, large public and private capital inflows, reinvestment of profits by major investors, economic openness, fairly stable macroeconomic conditions and continuous governance reforms.

The recent introduction of massive economic reforms by Prime Minister Hun Sen to make the economy more competitive and resilient; to develop counter measures to the rising cost of Cambodian exports to EU, and possibly even the US, with trade preferences and incentives being withdrawn; and to diversify the sources of growth by investing more in knowledge-based and innovation-driven economy and expanding the export market.

With all these positive developments, the Cambodian government needs to stay resilient within the context of economic turbulence facing the world due to the ongoing China–US trade spat, EBA revocation, taxation on rice exports and rising costs of production because of utility charges, rising labour costs, and small domestic market and relatively weak domestic supply chain of raw materials.

Over the years, especially since the 2013 general elections, due to the need for political expediency, the government had launched a series of worker friendly policies and guarantees which secured the ruling party the votes in 2018 but also lead to the rise of production cost due to policies that cause rising labour and related costs.

Labour costs, electricity, transportation and documentation processing costs probably account for the bulk of an exporter’s cost. The fact that production and productivity have been severely affected by the persistent yearly brownouts due to the lack of electricity supply does not help matters.

Thus, the prime minister’s various measures such as the abolishing of costs related to shipping costs, all coming under trade facilitation and fiscal incentives, including reducing input costs and customs procedures, are positive steps to maintain economic competitiveness and resilience.

The 17 points announced after March 29 includes reforms that cancel fees for certificates of origin, reduce electricity tariffs for the industrial sector, and withdraw the Cambodia Import Export Inspection and Fraud Repression Agency from all border checkpoints and the Kampuchea Shipping Agency and Brokers from all ports. It also includes a reduction to the number of national holidays and cuts to fees for using Cambodia’s ports by lowering custom and inspection charges.

Mr Hun Sen has said that the reform measures will reduce logistical costs for the private sector by lifting service fees at terminals and state ports, facilitating savings worth $6.7 million a year.

Although all these reforms seem enormous for a country which had gotten by largely with a minimum reform agenda in real terms such as cabinet reshuffle, preferring to leave the 2013 cabinet largely unchanged, it would be wise and timey for the prime minister or the Ministry of Economy and Finance announce their calculations as to what would be the real savings in terms of dollars and riels and also the percentage as compared with previous years.

We all know the withdrawal of EBA will hit Cambodia’s economy. Once numbers and percentages are known, the government and the private sector can then formulae more measures to trim the fat on the local production scene and see how much of the 12 percent export tax to the EU can be mitigated by lowering cost of production.

If this can happen, then buyers from the EU may still find Cambodian imports palatable due to marginal tax (if at all), established relations with local producers, the tax being passed on to consumers and the fact that Cambodian labour has developed by leaps and bounds by initiatives such as the Better Factories programme carried out by the International Labor Organisation.

Thus, it is over to the Ministry of Economy and Finance to crunch the numbers and reveal what will be the savings in terms of percentages and in terms of dollars and riels. The Ministry of Commerce has a heavy task to diversify Cambodia’s export markets by kickstarting bilateral FTA negotiations with key economic partners.

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