After zero growth in 1998, Cambodia's economy is rebounding. According to the ADB,

long-term prospects are good, but only if the government demonstrates the will to

reform.

Introduction

THE economic slowdown that began in mid 1997 with internal political disturbances

and the regional financial crisis continued into 1998. Investment continued to decline

because of the loss of external funds, both official and private.

The political stalemate continued to depress tourism and private domestic consumption.

The new govemment's stability and political will to implement reform will determine

the growth prospects of the Cambodian economy.

Recent trends and prospects

The economic expansion Cambodia enjoyed throughout the l990s ground to a halt

in 1998.

The combined effects of uncertain political conditions surrounding the mid-year election,

a prolonged regional economic downturn, and drought reduced the growth rate to zero.

Agricultural growth was only modest because of drought conditions that limited the

expansion of rice and livestock production and reduced fisheries production.

A steep contraction in construction, caused by the loss of external funding, offset

growth in manufacturing that occurred mainly in garments as a result of recent preferential

access to the US market.

As a consequence, there was no growth in industrial production. A fall in tourism

and a loss of consumer confidence hit retail trade sharply, leading to a contraction

of the service sector. Investment fell because of a drop in foreign aid brought about

by the political stalemate, and because of a loss of foreign direct investment arising

from the continued regional downturn.

Job creation continued in the garment sector, but urban service workers felt the

economic slowdown, as did the rural population.

Fewer seasonal employment opportunities in urban areas and rising rice prices squeezed

real incomes. The most recently reported unemployment rate of 0.7 percent in 1997

is misleading, because underemployment and low incomes are significant problems,

with 40 percent of the population living below the poverty line.

Preliminary estimates indicate that some deterioration occurred in the external sector.

The current account deficit (excluding transfers) rose slightly as a percentage of

GDP in 1998 relative to 1991.

Exports grew by 12.8 percent, which was supported by growth in garments, while wood

exports declined. Combined with a modest 3.4 percent increase in imports, this led

to an improvement in the trade balance, which was offset by an increased deficit

in services.

The 1998 capital account surplus fell because of a 20 percent drop in foreign direct

investment from 1997 levels and a rise in the unexplained component of the balance

of payments. Thus, the overall balance of payments surplus declined from $22 million

in 1997 to $8 million in 1998. Gross offficial reserves increased from 2.2 months

of imports in 1997 to 3.1 months in 1998 because of the release by the Bank for International

Settlements of gold reserves frozen since the 1970s.

About 63 percent of Cambodia's approximately $2.1 billion in external debt is debt

incurred to the former Council for Mutual Economic Assistance, for which rescheduling

is to be negotiated.

Turning to fiscal performance in 1998, revenues fell from 9.7 percent of GDP in 1997

to 8.5 percent of GDP, primarily because of shortfalls in nontax revenues such as

forestry royalties. Expenditures were 12.5 percent of GDP, lower than in 1997.

Although current expenditures were above the target set in the budget for 1998 (notably

for wages and for defense and security), capital expenditures were cut back from

a planned 5.1 to 3.6 percent of GDP. The overall budget deficit of 3.9 percent of

GDP was smaller than in 1997. However, foreign financing was lower than expected.

Thus the generally weak budget performance for 1998 included bank financing of about

125 billion riels.

The increase in net credit to the government was, however, offset by a fall in foreign

currency de- posits caused by political uncertainty, so that the growth of total

liquidity fell slightly from 16.6 percent in 1997 to 15.7 percent in 1998. The riel

depreciated by more than 10 percent against the dollar, and also against regional

currencies (nearly 30 percent against the Thai baht).

This contributed to an increase in inflation from about 9 percent in 1997 to some

12 percent in 1998. These figures may overstate purchasing power erosion because

of the widespread use of dollars in Cambodia, which negates the effects of depreciation

on riel-denominated consumer prices.

The outlook for 1999 and 2000 is for the economy to improve, as the formation of

the new government in late 1998 signaled at least a partial resolution of political

differences.

Thus services such as tourism and retail trade are expected to pick up. As aid flows

increase, public investment will rise and construction should rebound. This will

stimulate industrial growth.

If the new government has the political will to tackle the reform agenda of improving

forestry management, enhancing domestic resource mobilization, implementing civil

service reform, and initiating demobilization of the military, then Cambodia's long-term

prospects are reasonably good.

Issues in economic management

Immediately improving forestry management is critical. This issue affects nearly

every facet of economic development in the country.

Estimated long run government revenues of $40 million to $80 million resuiting from

sustainable forestry are sizable relative to total 1998 revenues of about $245 million.

In contrast, forestry revenues were about $6.1 million in 1998. In addition to hampering

domestic resource mobilization, poor forestry management increases the potential

for rapid environmental degradation. A loss of habitat is already affecting the fisheries

sector. Crop production will also be threatened as soil erosion and water runoff

increase.

Finally, the rural population is heavily dependent on the forests for supplemental

food and for cooking fuel.

Under international pressure because of the potential threat to economic development

from inadequate forestry management, the government has made some progress in analyzing

the problem with several studies sponsored by the international community and in

enacting some of the recommended reforms.

It is expected that the new government will make further progress in implementing

reforms. These include improved regulation of forest exploitation arrangements, enhanced

monitoring and control capabilities at the Department of Forests and Wildlife and

the Ministry of Finance, and revised concession contracts that are equitable and

are based on sound legal and forestry practice.

Policy and development issues

One of the principal long-term constraints to economic development is the poor

quality of human resources.

Low productivity and low wages already characterize the private sector labor force.

Moreover, the military and the civil service are overstaffed with low-skill, low-wage

personnel that must now be integrated into the private sector labor force.

One indicator of low productivity is the poor level of educational attainment. About

40 percent of the population never attended school, 32 percent are illiterate, and

less than 1 percent has had any training beyond high school.

Thus Cambodia lacks the skilled personnel to improve its administrative, legal, educational,

and medical institutions. Furthermore, public expenditures on education are low,

with the government share of educational expenditures as little as 25 percent.

Another indicator of low labor force productivity is poor health and nutrition. In

1995 life expectancy at birth was 53 years. In 1996 about 50 percent of children

age five and under were malnourished.

Infant mortality rates, maternal mortality rates, and total fertility rates are also

extremely high.

Leading causes of death include malaria, acute respiratory infections, tuberculosis,

road accidents, and mines. An impending crisis is the HIV/AIDS epidemic, the worst

in Asia, with 2.7 percent of the population infected, and the worst outside Africa.

Public expenditures on health are also low, which has led to one of the lowest rates

of health service utilization in the world.

With the recent resolution of political conflict, expectations are that the government

will be able to devote more resources to education and health.

 

Major

Economic Indicators, Cambodia, 1996-2000 (percent)

Items

1996

1997

1998

1999

2000

GDP growth

7.0

2.0

0.0

4.0

6.0

Gross domestic investment/GDP

25.9

19.0

15.0

18.4

19.0

Gross national savings/GDP

10.6

10.6

5.9

7.6

8.1

Inflation rate

(consumer price index)(*a)

9.0

9.1

12.0

10.0

6.0

Money supply (M2) growth

40.0

16.6

15.7

30.0

25.0

Fiscal balance/GDP

-8.4

-4.2

-3.9

-2.1

-2.5

Merchandise exports growth(*b)

22.1

63.1

12.8

17.7

15.0

Merchandise imports growth(*b)

13.6

2.1

3.4

21.4

18.0

Current account balance/GDP(*c)

-15.3

-8.4

-9.1

-10.8

-10.9

Debt service/exports(*d)

5.1

2.3

2.4

2.3

3.1

a. Final quarter basis.

b. Excludes re-exports.

c. Excluding official transfers.

d. As percent of domestic exports of goods and services only; also in convertible

currencies only.

Sources:

Ministry of Economy and Finance; National Bank of Cambodia; National Institute

of Statistics, Ministry of Planning; International Monetary Fund reports staff estimates.

 

Source: Asian Development

Bank, published by Oxford University Press. Full report available at Oxford University

Press offices or from the ADB.