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Widening foreign debt sources to boost economic growth

Sorn Sarath / Khmer Times Share:
Phnom Penh’s developing skyline. Economists warn of the dangers of borrowing from one source to grow. KT/Tep Sony

Having been criticised for its position toward China, the world’s second largest economy, from where most of its foreign debt has come for years, Cambodia is now more likely to change its foreign loan sources to boost economic growth.

According to a government official, the Kingdom is looking towards other sources such as Japan, South Korea and its development partners including the Asian Development Bank (ADB) and World Bank to balance its debts in the region – and these new sources for loans have soared notably for the last three years.

Permanent Secretary of State at the Ministry of Economy and Finance Vongsey Vissoth said that China accounted for up to more than 40 percent of the country’s total foreign debt.

However, he said for the last two or three years, getting loans from China is slowing down while loan sources from other countries and development partners have seen an increase.

“China is the biggest lender for Cambodia, but we would like to say that for the past two or three years, the country has received more loans from Japan, South Korea, the World Bank, ADB and while those from China are slowing down. So for the medium term, our loan portfolio will be more balanced,” he said.

Vissoth added that the country’s debt is less than 30 percent of gross domestic product (GDP). Therefore, Cambodia still has more room to borrow more money.

Economy researchers welcomed the government’s move to avoid a “debt trap”.

Hiroshi Suzuki, chief executive officer (CEO) of the Business Research Institute for Cambodia (BRIC) told Khmer Times by email that the share of debt outstanding from China is 47.48 percent based on the  Cambodia Public Debt Statistical Bulletin produced by the Ministry of Economy and Finance and this is very high compared with neighbouring countries.

“From the view point of lowering risk, it is in general very good that the Cambodian government has the intention of diversifying the source of its funds. It is said “Don’t put all your eggs in one basket,” he said.

“I would like to appreciate the Cambodian government’s effort to have a diversified source of funding. It is expected that Cambodia could get good quality debt, not only a good amount of debt, and use these diversified funds effectively for the development of Cambodia,” he added

Chan Sophal, director of the Centre for Policy Studies (CPS), said that because of sound macroeconomic management, Cambodia has the potential to increase borrowings and many lenders are willing to lend more to support and develop Cambodia.

“Often foreign aid for development projects comes with foreign expertise and conditions. So it is better to have multiple sources of debts than relying on a single one,” he said.

The report from the MEF, as of 2019, Cambodia’s public debt stood at $7.6 billion, 40 percent from China.

From 1993 to 2018, the government repaid $1.3 billion of its debt to development partners, roughly 8 percent of the country’s external debt, according to an official report on the country’s public debt.

Vissoth said Cambodia repaid to China alone around $200 million both principle and interest rate or nearly 50 percent a year.

Hiroshi said it also is good from the view point to avoid a “debt trap” with China. The most famous case of a Chinese debt trap is the Port of Hambantota in Sri Lanka.

“The government of Sri Lanka constructed Hambantota port with a loan from China. Because the government of Sri Lanka failed to make repayments, now the port is under the full control of China for 99 years,” he said.

Although the large volume of Chiness debt has benefited Cambodia, the conditions of debt from other countries and international organisation are sometimes softer than those of China.

The interest rate of Japanese official development assistance loans are only 0.01 percent per year and the maturity is 40 years, according to Hiroshi.

Hong Vannak, a business researcher at the Royal Academy of Cambodia. also warned of rising debt from a single source.

“Sri Lanka and Laos are getting into acrisis with foreign debt soaring to more than 40 percent of GDP, but getting loans is the government’s duty to ensure the country’s economic development. However, we need to balance our GDP or we will fall into an in-debt crisis”, he said.

He added while Cambodia is being criticised for leaning toward China, diversifying funding sources is a good option because China has already reached its economic peak.

“It also about political geography influence and countries in the region think Cambodia is closer to China,” he said.

“When China gets more involved in Cambodia, other countries such as Japan, and South Korea also think about their influence in the region as well,” Vannak said

The ADB just approved a $250 million loan to help the government of Cambodia respond to the COVID-19 pandemic and provide an economic stimulus to businesses.

Cambodia collected some $6 billion in tax last year, up more than $1.485 billion on the government’s target of $4.56 billion for the period.

According to the 2020 National Budget Law, the government is set to generate $5.272 billion in tax revenues this year.

Vannak welcomed the government’s move to mobilise more internal funding sources by reducing sources from outside the nation.

“If we are reliant on more outsourced funding we will fall under political influence while facing an economic crisis in the future,” he said.

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