Cambodia stands to benefit from an uptick in global and regional economic growth but will need to diversify its economy, improve infrastructure and reduce obstacles to doing business if it is to continue on its impressive growth track, a visiting International Monetary Fund (IMF) official said yesterday.
Speaking at the Royal University of Law and Economics in Phnom Penh, IMF Deputy Managing Director Mitsuhiro Furusawa said the global economy was gaining momentum after nearly a decade of sluggish growth. Higher growth in the US and stronger indicators in Europe, as well as continued rapid growth in Asia, have prompted the IMF to revise upward its regional and global forecasts, he said.
Accordingly, the IMF expects world economic growth, which stood at 3.4 percent last year, to accelerate to 3.5 percent this year and 3.6 percent in 2018. Growth in Asia is expected to reach 5.5 percent this year on improved outlooks in China and Japan.
Furusawa said the improved growth prospects present both an opportunity and a challenge for Cambodia. He said to capitalise on them, the Kingdom must diversify its economy and wean its reliance on low value-added garments. Failing to do so could see its GDP growth slow to 6.25 percent in the medium term, from the projected 7 percent this year.
He said Cambodia had positioned itself as a low-cost destination for garments manufacturers, but the footloose industry was highly susceptible to rising wage and production costs.
“Cambodia’s recent success as a clothing maker has benefited from China’s rising labour costs, and its transformation towards higher value-added production,” he said. “However, as your wages and other costs rise, there will be countries happy to lure your garment factories away. Competition in this market is tough.”
Furusawa said the Kingdom faced several challenges to its medium-term growth, namely shortcomings in infrastructure, “sometimes burdensome” government procedures that complicate doing business, and a need to improve governance. However, he said the government’s Industrial Development Policy, which aims to upgrade Cambodia’s industrial structure from a labour-intensive production base to a skills-driven one by 2025, could tackle many of these issues.
“If implemented in timely and effective fashion, this policy could promote diversification and sustained growth,” he said.
The senior IMF official also saw challenges in Cambodia’s “underdeveloped” financial system, where rapid credit growth has exposed vulnerabilities in the banking industry. He expressed concern over industry’s heavy exposure to the real estate sector, over-reliance on foreign borrowing and the rapid growth of microfinance institutions.
Moreover, he said the high level of dollarisation limits the government’s policy actions to respond to the situation.
Furusawa stressed that it was important that the government addresses these issues now rather than wait until an economic slowdown or external shock.
“These issues may appear to pose less risk at this moment of strong growth, but they can become more critical if circumstances change – here in Cambodia or in the outside world,” he said.