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Structural problems causing garment woes: World Bank

091105_07
A cassava farmer sorts his stock in Battambang province last week. Agriculture remains the driver of Cambodia's GDP, the World Bank said Wednesday, as the garment sector has lost US clients.

Forecasting 2 percent contraction in GDP this year, Washington-based lender says Cambodian garment sector has seen United States market share slide

THE World Bank pointed towards structural problems in Cambodia’s garment industry Wednesday as it released a report predicting the country’s economy would shrink 2 percent this year.

Speaking by videoconference from Washington, Ivailo Izvorski, the lead author of the bank’s latest East Asia and Pacific Update, titled “Transforming the Rebound into Recovery”, said Cambodia’s market share in the key United States garment market had fallen from 3.2 percent last year to 2.8 percent in mid-2009.

All countries in the region had been hit hard as US demand for garments plummeted in the midst of the economic and financial crisis, but Cambodia was hit hardest.

“We see a very negative development, where Cambodia’s garment exports are losing market share in the US, suggesting that perhaps there are deeper structural problems with competitiveness,” he said. “Whether that will be reversed is very hard to say, but the fact they lost position is something that they have to think about … given how large the garment sector looms for the economy.”

Total garment exports fell 26 percent over the first six months of 2009, according to World Bank figures, leading to the closure of 18 percent of garment factories and the loss of around 65,000 jobs. Cambodia Ministry of Commerce figures show the US takes around 70 percent of the country’s garment exports.

The garment industry was identified as one of three key sectors hit hard by the global financial crisis. A decline in tourist arrivals and construction activity was also dragging down the economy, which grew 6.7 percent last year and by double digits in each of the preceding four years, the report said. Only agriculture, which accounts for 27 percent of GDP, was performing strongly, with continued improvement in paddy production.

World Bank Senior Country Economist for Cambodia Stephane Guimbert said agriculture looked set to grow around 5 percent this year and next, providing the bedrock for a 4 percent expansion in 2010 when combined with a slight recovery in other sectors, he said.

Crisis hits home hard
Along with Malaysia and Thailand, Cambodia was rated among the worst-performing economies in developing East Asia and the Pacific, which was set to grow 6.7 percent this year on the back of projected growth of 8.7 percent in China.

The report labelled the economic rebound “surprisingly swift and very welcome” but noted the regional outlook was “less rosy” if China was removed from the picture, expanding just 1 percent this year, more slowly than South Asia, the Middle East and North Africa, and only slightly faster than Sub-Saharan Africa.

Izvorski warned that Cambodia was not likely to benefit directly from China’s growth, as much of its demand was for imports of commodities, parts and components for processing, and whiteware, none of which were sourced from Cambodia.

However, other countries including South Korea and Japan would benefit, indirectly boosting Cambodia.

“As the rising tide lifts all ships, I think you can expect to see Cambodia benefiting from a return of tourism, a return of demand for garments, but I don’t think there will necessarily be any direct relationship between China and Cambodia,” Izvorski said.

Praise for stimulus
Guimbert said Cambodia’s use of a fiscal stimulus “was very appropriate to support the economy”, but warned that the government could not afford to maintain an expansionary fiscal position indefinitely.

He said the deficit was expected to expand to 6.7 percent of GDP this year, well above the budget target of 4 percent, mainly due to a larger wage bill and an increase in capital expenditure.

Cambodia entered the crisis after years of budget surpluses in which it built up government deposits, giving it the fiscal space to increase spending, but Guimbert warned that maintaining the stimulus too long could create systemic problems in the economy, as it would eventually need to borrow to fund spending.

However, tightening too quickly could derail growth.

“That’s the tough call that the government has to make this year,” he said. “How to maintain the very prudent fiscal stance that was achieved over the last 10 years or so but on the other hand how to continue supporting the economy.”

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