The fund cites continued downturn in key garment sector and big drop in foreign direct investment for revision, despite expected agricultural growth
THE International Monetary Fund (IMF) has downgraded its forecast for economic growth this year and warned the Cambodian government that it needs to steer spending from civil service wage growth towards social and infrastructure spending.
The fund said it now expected the Cambodian economy to contract 2.75 percent this year, a much more pessimistic forecast than it made in March when it said the economy would contract just 0.5 percent. In December last year, the body predicted a 4.75 percent expansion in the economy for 2009.
“Several areas of the economy are not performing as well as we expected in March,” said David Cowen, the deputy division chief in the IMF’s Asia and Pacific Department.
He singled out the effect of the economic crisis on the export, tourism and construction sectors as the major reasons for the revision, which follows a two-week visit by an IMF mission from Washington DC.
“It was clearly evident Cambodia was being affected by the global economic situation,” Cowen said.
The Asian Development Bank said Tuesday it expected Cambodia’s economy to contract 1.5 percent this year, in line with a projection made earlier this month by the Economist Intelligence Unit.
Garment exports were expected to fall 15 percent, mainly due to lower consumption in the United States, which accounts for around two-thirds of Cambodia’s garment exports.
“In part, that is due to poor retail sales in the US, and also because Cambodia remains less competitive vis-a-vis some of the other garment exporters in the region and has been losing some market share to places like Vietnam and Bangladesh during the current economic slowdown,” Cowan said.
Foreign direct investment inflows have also taken a hit and were likely to fall to US$490 million this year from $815 million in 2008, largely as a result of reduced spending on major construction projects.
The major bright spot was the agricultural sector, where a good harvest and productivity gains made possible by investments in rural roads and irrigation looked likely to lead to 5 percent growth in the sector this year, the IMF said.
The agriculture sector would next year also lead the economy, which was expected to grow 4.25 percent as “signs of recovery in other sectors” also materialise.
However, Cowen said there was still a lot of uncertainty over 2010 economic prospects and that “risk remains to the downside”.
Growth in 2010 would be driven by external demand, but Cowen said it would also depend on some pickup in domestic demand. This would in turn depend on stable rice prices as the rural sector was still the main driver of wholesale and retail spending in the economy.
Inflation was projected to pick up towards the end of the year, with an overall increase in consumer prices of 5.25 percent year-on-year for 2009 and as much as 6 percent in 2010.
The IMF also projected the current account deficit would narrow to 5.5 percent of gross domestic product from 10.5 percent last year as imports continued to contract at a faster pace than exports, largely due to lower fuel prices and declining imports of construction materials and some consumer goods, especially motorcycles and cars.
Increases in the civil service and wage bill, and higher capital spending were also likely to raise the budget deficit to 6.75 percent of GDP, up from 2.75 percent last year and well ahead of the government’s target of 4 percent for the year.
In March, the IMF told the government it could afford to expand its budget deficit to around 5 percent of GDP to stimulate domestic demand through increased spending on infrastructure development and on priority areas of health, education and rural development.
Spending change required
Cowen said the budget deficit had instead been driven by an increased wage bill for the civil service and military and cautioned the government to avoid any further wage bill expansion and instead direct extra spending to priority areas.
“The government should gear as much of its spending as possible towards these groups,” Cowen said. “A deficit of 5.5 percent or somewhat lower will provide the Royal Government of Cambodia with sufficient latitude to address its key social and development needs.”
In terms of the banking system, the IMF said an increase in deposits had created “ample liquidity” in the country’s banks but had raised profitability concerns as the downturn in the economy had made it harder to intermediate liquidity back into the economy through lending.
It noted the rise in non-performing loans in the sector to 5.2 percent as of the end of May, according to National Bank of Cambodia figures, but said some of the increase was likely to be due to more accurate reporting by banks.