CAMBODIA ECONOMIC UPDATE ROAD TO RECOVERY SPECIAL FOCUS GOVERNMENT-TO-PERSON (G2P) PAYMENTS FOR SOCIAL BENEFITS JUNE 2021 CAMBODIA ECONOMIC UPDATE JUNE 2021 ROAD TO RECOVERY TABLE OF CONTENTS TABLE OF CONTENTS ACKNOWLEDGEMENTS������������������������������������������������������������������������������������������������������������������������ 7 ABBREVIATIONS������������������������������������������������������������������������������������������������������������������������������������� 8 EXECUTIVE SUMMARY�������������������������������������������������������������������������������������������������������������������������� 9 RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK������������������������������������������������������������16 Recent developments��������������������������������������������������������������������������������������������������������������������������16 Despite vigorous containment efforts, local outbreaks resurged ��������������������������������������������������������������������������������16 Coronavirus vaccination program has started�������������������������������������������������������������������������������������������������������������������16 Notwithstanding uneven containment, economies of the region bounced back���������������������������������������������������17 Exports are gradually recovering, thanks to revitalization of global demand��������������������������������������������������������������17 Cambodia’s manufacturing exports to the United States rose����������������������������������������������������������������������������������������19 FDI inflows started to recover ��������������������������������������������������������������������������������������������������������������������������������������������20 Challenges in investment climate reforms remained��������������������������������������������������������������������������������������������������������21 Construction continued to be subdued due to excess supply ����������������������������������������������������������������������������������������21 Agricultural production remained resilient������������������������������������������������������������������������������������������������������������������������23 Domestic price volatility affected agricultural production�����������������������������������������������������������������������������������������������24 The CCFTA is expected to boost agricultural performance�������������������������������������������������������������������������������������������25 The first state-owned credit guarantee corporation was established�����������������������������������������������������������������������������25 Rising ocean freight rates slowed Cambodia’s milled rice exports ��������������������������������������������������������������������������������25 An unprecedented lockdown caused further detriment to the tourism industry ��������������������������������������������������������26 Subdued consumption was further hit by the recent lockdown�������������������������������������������������������������������������������������27 Inflation eased further as food prices decelerated �����������������������������������������������������������������������������������������������������������27 A surge in nontraditional exports partly helped stabilize the external position ����������������������������������������������������������27 Monetary policy easing continued���������������������������������������������������������������������������������������������������������������������������������������28 Broad money growth remained strong as foreign currency deposits improved����������������������������������������������������������29 Domestic credit and deposit growth stabilized as confidence improved����������������������������������������������������������������������29 Poverty is estimated to have increased regardless of the government’s response�������������������������������������������������������30 Revenue collection slowed further as impacts of the pandemic were felt��������������������������������������������������������������������32 Government intervention is budgeted at US$719 million�����������������������������������������������������������������������������������������������33 The overall deficit continued to be financed by current savings and external borrowing������������������������������������������33 Rising domestically financed capital during the pandemic boosted total capital spending ���������������������������������������34 Cambodia’s public debt rose, but risk of debt distress remains low������������������������������������������������������������������������������35 Last year, loan disbursement from ADB was the largest�������������������������������������������������������������������������������������������������36 Unlike its peers, Cambodia’s public debt is entirely external�������������������������������������������������������������������������������������������36 Outlook������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������37 Challenges and risks���������������������������������������������������������������������������������������������������������������������������������������������������������������40 Policy options��������������������������������������������������������������������������������������������������������������������������������������������������������������������������41 SPECIAL FOCUS: GOVERNMENT-TO-PERSON (G2P) PAYMENTS FOR SOCIAL BENEFITS����44 Introduction��������������������������������������������������������������������������������������������������������������������������������������� 44 RGC response to the COVID-19 pandemic��������������������������������������������������������������������������������������� 44 Social Assistance Delivery Program: Payment Mechanism�������������������������������������������������������������� 46 Policy recommendations������������������������������������������������������������������������������������������������������������������� 52 Improving the social assistance landscape in Cambodia��������������������������������������������������������������������������������������������������52 Improving G2P payments in the current scenario������������������������������������������������������������������������������������������������������������52 Improving G2P delivery: a potential future scenario�������������������������������������������������������������������������������������������������������53 Government payment programs in Cambodia: a strategic approach to reforms��������������������������������������������������������54 ANNEX. SELECTED INDICATORS����������������������������������������������������������������������������������������������������� 56 Bibliography�������������������������������������������������������������������������������������������������������������������������������������� 57 4 CAMBODIA ECONOMIC UPDATE | JUNE 2021 BOXES & FIGURES BOXES Box 1: Global economic developments and outlook ��������������������������������������������������������������������������������������������18 Box 2: Factors behind Vietnam’s robust economy growth�����������������������������������������������������������������������������������22 Box 3: Impacts of COVID-19 on households—results from the High-Frequency Phone Survey of Households�������������������������������������������������������������������������������������������������������������������������������������������������������31 Box S.1. Cambodia’s Social Protection Response to COVID-19����������������������������������������������������������������������������45 Box S.2. Retail Payment Systems in Cambodia�����������������������������������������������������������������������������������������������������������49 Box S.3. The market for retail payment services in Cambodia��������������������������������������������������������������������������������50 Box S.4. The Case of Jordan: Lockdown but not shutdown�����������������������������������������������������������������������������������51 FIGURES Figure ES.1: Cambodia’s Recent Developments at a Glance������������������������������������������������������������������������������������������14 Figure 1: Coronavirus cases have surged����������������������������������������������������������������������������������������������������������������������16 Figure 2: Vaccinations accelerated���������������������������������������������������������������������������������������������������������������������������������16 Figure 3: Cambodia’s mobility Apple trends index deteriorated�������������������������������������������������������������������������������16 Figure 4: Goods exports in the region accelerated�����������������������������������������������������������������������������������������������������19 Figure 5: Declining share of garment exports in total goods (excluding gold) exports���������������������������������������19 Figure 6: Cambodia’s exports recovered ���������������������������������������������������������������������������������������������������������������������19 Figure 7: Approved FDI project value expanded�������������������������������������������������������������������������������������������������������20 Figure 8: Rising FDI projects going to non-garment industries �����������������������������������������������������������������������������20 Figure 9: FDI inflows to Cambodia and Vietnam followed a similar trend�����������������������������������������������������������20 Figure 10: Real estate prices declined������������������������������������������������������������������������������������������������������������������������������23 Figure 11: Basic construction materials imports contracted���������������������������������������������������������������������������������������23 Figure 12: Approved construction permits declined����������������������������������������������������������������������������������������������������23 Figure 13: Wet season rice production was subdued����������������������������������������������������������������������������������������������������24 Figure 14: Dry season rice yields fluctuated�������������������������������������������������������������������������������������������������������������������24 Figure 15: Domestic agricultural commodity prices were volatile������������������������������������������������������������������������������24 Figure 16: International arrivals and Angkor revenue collapsed���������������������������������������������������������������������������������26 Figure 17: Imports of consumer goods slowly recovered�������������������������������������������������������������������������������������������26 Figure 18: Inflation was further subdued�����������������������������������������������������������������������������������������������������������������������26 Figure 19: Nominal exchange rate was broadly stable, within a ±2 percent range��������������������������������������������������28 Figure 20: FDI inflows were broadly stable�������������������������������������������������������������������������������������������������������������������28 Figure 21: Gross international reserves rose������������������������������������������������������������������������������������������������������������������28 Figure 22: Broad money growth recovered��������������������������������������������������������������������������������������������������������������������29 Figure 23: Domestic credit and deposits picked up������������������������������������������������������������������������������������������������������29 Figure 24: Contribution of construction to credit growth accelerated���������������������������������������������������������������������29 Figure 25: Central government domestic revenue eased����������������������������������������������������������������������������������������������32 CAMBODIA ECONOMIC UPDATE | JUNE 2021 5 FIGURES & TABLES Figure 26: Central government expenditure slowed�����������������������������������������������������������������������������������������������������32 Figure 27: Social benefits and grants rose����������������������������������������������������������������������������������������������������������������������32 Figure 28: The general government overall fiscal deficit widened�����������������������������������������������������������������������������34 Figure 29: Foreign borrowing financed the fiscal deficit����������������������������������������������������������������������������������������������34 Figure 30: Government savings remained solid������������������������������������������������������������������������������������������������������������34 Figure 31: Public investment is rising ����������������������������������������������������������������������������������������������������������������������������35 Figure 32: Cambodia’s net investment in nonfinancial assets is large������������������������������������������������������������������������35 Figure 33: Gross fixed investment rose��������������������������������������������������������������������������������������������������������������������������35 Figure 34: Public debt is rising�����������������������������������������������������������������������������������������������������������������������������������������36 Figure 35: Cambodia is heavily dependent on China as official creditor������������������������������������������������������������������36 Figure 36: Unlike its peers, Cambodia had no domestic public debt�������������������������������������������������������������������������36 Figure B1.1. Commodity prices�������������������������������������������������������������������������������������������������������������������������������������������18 Figure B1.2. Global weekly new infections of COVID-19���������������������������������������������������������������������������������������������18 Figure B2.1. Vietnam’s exports diversified, consisting largely of high-value-added products�����������������������������������22 Figure B2.2. Cambodia’s exports remain heavily dependent on garments��������������������������������������������������������������������22 Figure B2.3. Driven by electronics, Vietnam’s exports performed very well����������������������������������������������������������������22 Figure B3.1. Changes in income by source since November 2019��������������������������������������������������������������������������������31 Figure B3.2. Children engaged in education or learning activities in the last 7 days����������������������������������������������������31 Figure S1: Household well-being increases with higher amounts of received relief transfers������������������������������46 Figure S2: Benefit registration and disbursement process�������������������������������������������������������������������������������������������47 Figure S3: Average travel time������������������������������������������������������������������������������������������������������������������������������������������47 Figure S4: Percentage of households traveling 45+ minutes Average travel time���������������������������������������������������47 Figure S5: Percentage of adults with a formal account������������������������������������������������������������������������������������������������48 Figure S6: Percentage of the population with an account at a financial institution or mobile money provider�����48 Figure S7: Percentage of adults who have made a digital payment����������������������������������������������������������������������������48 Figure S8: Do you have a payment account? (%)����������������������������������������������������������������������������������������������������������48 Figure S9: Do you use anything other than cash to make payments?������������������������������������������������������������������������48 TABLES Table 1: Debt disbursements (US$ million) and contribution to debt disbursement growth ���������������������������37 Table 2: Macro outlook (baseline)��������������������������������������������������������������������������������������������������������������������������������38 Table 3: Assumption matrix under the baseline and downside scenarios�������������������������������������������������������������39 6 CAMBODIA ECONOMIC UPDATE | JUNE 2021 ACKNOWLEDGEMENTS ACKNOWLEDGEMENTS The June 2021 Cambodia Economic Update The CEU, produced biannually, provides (CEU) was prepared by Sodeth Ly, with up-to-date information on macroeconomic contributions from Marco Nicolì, Maheshwor developments in Cambodia. It is distributed and Shrestha, Robert J. Palacios, Biagio Bossone, discussed widely including among Cambodian Kimsun Tong, Wendy Karamba, and Ekaterine authorities, development partners, the private Vashakmadze. Chankesey Heav served as research sector, think tanks, civil society organizations, and assistant. Saroeun Bou helped with the press academia. release, web display, and dissemination events. For information about the World Bank and its The team worked under the overall guidance activities in Cambodia, please visit our website at of Deepak Mishra. The team is grateful for www.worldbank.org/cambodia. the advice and comments provided by Inguna To be included in the email distribution list of Dobraja, Mariam Sherman, and Hassan Zaman. the CEU and related publications, please contact Several colleagues provided comments on the Chankesey Heav (cheav@worldbank.org). For draft version including Aaditya Mattoo, Ergys questions on the contents of this publication, please Islamaj, Duong Le, and Daisuke Fukuzawa. contact Saroeun Bou (sbou@worldbank.org). The team is grateful to the Cambodian authorities, The findings, interpretations, and conclusions particularly the Ministry of Economy and expressed in this report do not necessarily reflect Finance and the National Bank of Cambodia, for the views of the Executive Directors of the their cooperation and support. The report also World Bank or the governments they represent. benefited from the advice, comments, and views The World Bank does not guarantee the accuracy of various stakeholders in Cambodia, including its of the data included in this work. enthusiastic readers and critics. CAMBODIA ECONOMIC UPDATE | JUNE 2021 7 ABBREVIATIONS ADB Asian Development Bank ASEAN Association of Southeast Asian Nations BRGS Business Recovery Guarantee Scheme CCFTA Cambodia-China Free Trade Agreement CEU Cambodia Economic Update CGCC Guarantee Corporation of Cambodia COVID-19 coronavirus disease 2019 CR Cambodian riel CSS Cambodian Shared Switch DSA debt sustainability analysis EAP East Asia and Pacific region EBA Everything But Arms EC European Commission EU European Union FDI foreign direct investment FOB Free on Board FTA free trade agreement G2P government-to-person GDP gross domestic product GFT garment, footwear, travel GPPs Government Payment Programs GSP Generalized System of Preferences HFPSH High-Frequency Phone Survey of Households IDPoor identification of poor MDI Micro Deposit-taking Institution NBC National Bank of Cambodia NPIs nonpharmaceutical interventions NPL nonperforming loan NPS National Payments System P2G person-to-government PIMSRS Public Investment Management System Reform Strategy PSI Payment Service Institution RCEP Regional Comprehensive Economic Partnership RGC Royal Government of Cambodia RPS Retail Payments System SMEs small and medium-sized enterprises UK United Kingdom U.S. United States US$ United States dollar y/y year-on-year 8 CAMBODIA ECONOMIC UPDATE | JUNE 2021 EXECUTIVE SUMMARY EXECUTIVE SUMMARY Recent developments liquidity via Liquidity-Providing Collateralized Operation facilities according to riel exchange After contracting by 3.1 percent in 2020, rate and liquidity conditions; and (iii) maintain Cambodia’s economy has gradually recovered. the reserve requirement ratio at 7 percent for The recovery is, however, uneven, partial, and both riel and U.S. dollar deposits and borrowings volatile in part due to the re-introduction of a until the end of the first semester of 2021, and as domestic lockdown, triggered by recent flare-ups necessary. Subsequently, in May 2021, the central of coronavirus infections. Like many countries bank issued its third round monetary easing in the region, Cambodia has been hit hard by measures which include, among other things, (i) global demand shock and coronavirus-related a decision to maintain a reserve requirement ratio shutdowns which have had predictably uneven at 7 percent for both riel and U.S. dollar deposits economic impacts across sectors. The agriculture and borrowings until further notice; and (ii) a sector has been relatively resilient in the face of permission to allow the banking and microfinance the coronavirus shock. In addition, it has been sectors to continue to restructure loans until boosted by increased investment, thanks to good the end of 2021. The COVID-19 vaccination prospects of the newly signed Cambodia-China program began in February 2021 and has quickly Free Trade Agreement (CCFTA) and Regional accelerated. A national COVID-19 vaccination Comprehensive Economic Partnership (RCEP). strategic plan was introduced in May 2021. The manufacturing sector sharply contracted last year, but appears to have gradually recovered since, Goods exports have recovered. Merchandise as it has adapted to changing external conditions. (excluding gold) exports grew at 12.2 percent The easing of the traditional manufacturing in the first four months of 2021. Despite rising industries, namely garment, footwear, and travel shipping costs, exports of GFT products, which (GFT) goods has been partly offset by the bottomed out in January 2021, contracting by expansion of the newly emerging manufacturing 13.2 percent y/y, have recovered since, growing at (electrical, electronic and vehicle parts including 10.2 percent and 27.8 percent in March and April bicycles) and agroprocessing industries. Parts 2021, respectively. In the first four months of of the services sector such as accommodation, 2021, exports of bicycles and combined vehicle, restaurants and transport continue to be hit hard by electrical, and electronic parts grew at 32.3 percent slowdown in domestic and international tourism, and 16.4 percent, respectively. Exports of garment while wholesale and retail trade has managed to and textile products no longer accounted for the slowly recover, supported by a gradual revival in majority of merchandise exports. The share of domestic economic activity. garment exports in total goods (excluding gold) exports declined to 45.6 percent in the first four The government has the ability to provide months of 2021, down from 52.2% in 2020 (and further fiscal and monetary support as the 57.6% in 2019). Although a small segment of the pandemic intensifies. In 2021, the budget for housing market–low and affordable residential COVID-19-related relief and recovery intervention property–remained resilient, the downturn in the is US$719 million, compared to US$823 million construction and real estate sector continued. in 2020. The central bank has extended its In the first four months of 2021, approved accommodative monetary policy. The National construction permit value plummeted, contracting Bank of Cambodia decided in its Monetary Policy by 41.5 percent, while cement imports contracted Committee meeting held in February 2021 to: (i) by 19.2 percent. However, imports of steel and continue to maintain exchange rate stability via cooling equipment such as air conditioners grew its exchange market intervention; (ii) provide riel by 5.4 percent and 24.1 percent, respectively. CAMBODIA ECONOMIC UPDATE | JUNE 2021 9 EXECUTIVE SUMMARY Resilient FDI inflows helped sustain the households, or 19.5 percent of all households, external sector. In 2020, FDI inflows reached have received a cash transfer from the government. US$3.4 billion or 13.6 percent of GDP, compared Employment activity is showing signs of recovery. to US$3.5 billion or 13.2 percent of GDP in According to the survey of households, the 2019. In 2020, the current account deficit was percentage of respondents who were employed fully financed by FDI, while gross international in December 2020, returned to the level recorded reserves accumulated further, reaching to US$21.5 in May and August 2020, but remained below its billion or more than 10 months of prospective pre-pandemic level. imports. Despite rising retail prices of petroleum Outlook products, inflation remained contained, declining to 1.7 percent in February 2021, compared to 2.9 Cambodia’s growth outlook remains highly percent at the end of 2020, partly supported by uncertain as the actual shape and pace of recovery the easing of food prices and a broadly stable is largely dependent on the course of the virus and exchange rate which reached riel 4,072 per U.S. the pace at which the vaccine can be rolled out. dollar at the end of May 2021, compared to riel Therefore, we explore two scenarios: a baseline 4,042 per U.S. dollar at the end of 2020. scenario, which is based on more optimistic assumptions on infection and vaccination; and a Monetary conditions continued to be downside scenario, which assumes the realization accommodative. Broad money growth remained of most of the downside risks. sustained, expanding at 15.2 percent as of February 2021. Thanks to the central bank’s Under the baseline scenario, the economy accommodative monetary policy, domestic is projected to grow by 4 percent in 2021, credit provided to the private sector accelerated, supported by a gradual recovery in domestic growing at 19.5 percent as of February 2021, demand following the vaccine deployment compared to 17.7 percent at the end of 2020, as and improvements in external demand and economic activity improved. The credit-to-GDP capital inflows. The projections assume that ratio increased to 142.2 percent in 2020, up from market confidence is restored, while the current 114.2 percent in 2019. Deposit growth remained community outbreaks, which began in February held up, expanding at 15.4 percent as of February 2021 remain under control, resulting in a staged 2021, mirroring continued strong capital inflows. easing of the lockdown restrictions without significant mid- to long-term adverse impacts The overall fiscal deficit is estimated to have on the corporate or banking sector. FDI inflows widened but remained at a moderate level of are steadily returning. Under the baseline, it is 2.7 percent of GDP in 2020. Notwithstanding expected that the authorities are taking steps to unprecedented increase in COVID-19 related attract further investment and promote trade by spending, estimated at 4 percent of GDP, efforts introducing a new investment law in the second were made to contain expenditure with a reduction half of 2021, boosted by the recently signed free in spending on goods and services and other non- trade agreements. Under Cambodia’s economic priority spending. Total expenditure increase is, recovery plan, efforts are underway to boost therefore, estimated to have been modest, rising competitiveness through investment climate to 26.8 percent of GDP in 2020, up from 25.5 reforms and leveraging of digital technologies. percent of GDP in 2019. In addition, impacts of The authorities pursue a countercyclical fiscal the pandemic on domestic revenue were lessened policy with a continued social protection program, by ballooned profit taxes for 2019 which were while boosting public investment. Public debt and collected in April 2020. budget pressures have risen sharply and are likely The new cash transfer scheme for poor and to persist, and the authorities will need to consider vulnerable households has seen increased options for restoring fiscal discipline once the demand. As of January 2021, more than 710,000 recovery takes hold. 10 CAMBODIA ECONOMIC UPDATE | JUNE 2021 EXECUTIVE SUMMARY Under the downside scenario, the economy Challenges and risks is projected to grow at 1.0 percent in 2021. Risks to Cambodia’s growth outlook have The downside scenario assumes a deterioration intensified as the current wave of coronavirus in domestic economic conditions caused by outbreaks lingers. Domestic economic activity repeated lockdowns and travel restrictions as has recently been disrupted by the reintroduction efforts to contain the outbreaks are not successful, of lockdown during the second half of April preventing economic recovery from taking hold, 2021. The lockdown which was imposed on the regardless of improvements in external conditions. two largest urban centers–-Phnom Penh and Containment efforts drain public resources Takhmao, the second-most-populated city in while deployment of the vaccination program is Kandal province–-was necessary and saved lives, assumed to have progressed slowly. Consequently, though may also been economically damaging. market confidence is subdued, leading to a marked The current high infection rate is also threatening slowdown in FDI inflows, while the main export- the public health system. Factories and businesses oriented manufacturing sector such as GFT goods were affected, while domestic demand, especially is disrupted by repeated lockdowns and impacted for services products such as domestic travel, by the partial withdrawal of the “Everything But tourism, and hospitality services, were once again Arms” arrangement and temporary expiration hit by travel restrictions, travel avoidance, and of the Generalized System of Preferences. The declining incomes. This will likely be a drag on fiscal deficit widens, as spending pressures rise, growth until wider vaccine deployment. while domestic revenue declines sharply, caused by prolonged and sluggish domestic economic Cambodia’s growth model—characterized activity. As public debt and budget pressures by a narrow export base with a high degree persist, external borrowing and drawdown of the of concentration of products and markets— government’s current savings increase, requiring exhibited weaknesses years before the more time before fiscal discipline can be restored. pandemic hit. While the country has a well- established, labor-intensive, and export-oriented In the post-pandemic world, Cambodia’s garment industry, the manufacturing sector has economy will likely follow a new trajectory for decades remained largely engaged in the (a new normal), expanding rather moderately “cut-make-trim” process, the lowest value-added in the short-term. Cambodia’s economy is section of the entire value chain. The country’s tourist-dependent. Regardless of a recovery in external competitiveness eroded, partly caused by domestic tourism after the easing of lockdowns, rapidly rising wages—made worse by a dollarized global tourism is expected to remain below pre- economy—and exacerbated by challenges in pandemic levels until 2023. Global economic doing business and investment climate reforms. recovery, supported in part by the significant U.S. The vulnerabilities, however, were masked by a stimulus, will revive trade in goods and could surge in capital inflows in the pre-coronavirus provide an external boost to growth of as much as crisis period to largely finance the construction 1 percentage point on average, but global tourism and real estate sector. With the collapse of the is expected to remain below pre-pandemic tourism sector and a stalled construction boom, levels until 2023, which will delay economic the pandemic has exposed Cambodia’s structural recovery in tourism-dependent economies. A weaknesses. structural change, driven by a diversification of FDI projects which were earlier concentrated Along with domestic weaknesses, an largely in the construction and real estate sector uncertain global outlook remains a key risk to non-garment manufacturing and agricultural to Cambodia’s recovery. Delays in global commodity exports appears to be emerging, vaccine distribution could lead to the persistence adapting to changes in domestic economic and of the pandemic, while outbreaks trigger more external demand conditions. lockdowns. Cambodia’s merchandise exports will CAMBODIA ECONOMIC UPDATE | JUNE 2021 11 EXECUTIVE SUMMARY likely be further impacted by partial withdrawal age group by September 2021. The plan targets of the “Everything But Arms” arrangement and to fully vaccinating about 5 million people under temporary expiration of the Generalized System of the first priority group during May to November Preferences. In addition, Cambodia is increasingly 2021, a period of seven months, with about 10 dependent on China in trade, investment, and million doses of coronavirus vaccines. As of end- official development assistance. High credit April 2021, about 2.4 million doses of the vaccines growth in the banking sector, particularly to the have deployed. So, the plan should achieve an construction and real estate sector, remains a key average of 1.1 million doses per month during risk to Cambodia’s financial stability. May to November 2021 to completely deploy the Following a local outbreak that started on remaining 7.6 million doses. A masterplan for February 20, 2021, Cambodia has experienced COVID-19 vaccination published in March 2021 rapidly rising reported coronavirus cases and by the Ministry of Health targets vaccinating 10 deaths. As of May 31, 2021, there were 30,094 million people by mid-2022. cases and 214 deaths. The pandemic threatens Given the country’s relatively large fiscal to reverse years of extraordinary development space, further boosting pro-poor and growth- gains in the country. In the absence of significant enhancing public investment including cash- mitigation measures, the COVID-19 pandemic for-work projects, is critical for economic could result in sharply rising unemployment and recovery. In this regard, the 2021 budget has increased poverty. Poverty simulations based on boosted domestically financed public investment macroeconomic projections show that a sharp which, for the first time, exceeds externally financed economic slowdown would produce a substantial public investment. More efforts are, however, increase in poverty of between 5.4 and 6.0 needed to improve the business and investment percentage points. This translates into between climate, especially to facilitate the structural 859,000 to 950,000 additional poor and a reversal change as the construction boom has stalled and of six years of progress against poverty. Of these, more investment is now going into production to households relying on non-agricultural wages, serve mostly exports, while shoring up confidence particularly construction workers, will be hit with introduction of the new investment law, hardest by the outbreak. taking advantage of the CCFTA and RCEP. As Policy options the economy is highly dollarized, fiscal policy will continue to be a sole macroeconomic It is urgent to accelerate implementation of instrument to support relief, recovery, and the vaccination program, while continuing growth. Relief continues to be needed, especially to effectively contain the rising infection for poor and vulnerable households. Recovery cases and deaths. Given potentially lingering requires improvements in investment climate outbreaks across the country, the benefits of and incentives to spur investment and to boost rapid vaccination in reducing growing numbers exports because the COVID-19 shock threatens of hospitalization and deaths, while relieving to lock the economy into an underemployment pressures on the struggling health system equilibrium. Growth requires further public will outweigh its costs. Non-pharmaceutical investment to improve the quality of both hard interventions can also play a complementary (physical) and soft (regulatory) infrastructure to role in the containment of the disease. Of a reduce transport and logistics costs in order to Cambodian population of more than 15 million, boost external competitiveness. over 10.1 million are aged 18 and older and may need to be vaccinated. Thus, Cambodia needs It is imperative to continue to closely monitor over 20 million doses of coronavirus vaccines for vulnerabilities arising from a prolonged this age group alone. Based on the authorities’ property boom and the increase of credit national COVID-19 vaccination strategic plan, provided to the construction sector during the the country expects to obtain 13.5 million doses, pre-pandemic period. The loan-to-deposit ratio or about 66 percent of the needed vaccines for the already reached 120 percent in 2020, up from 12 CAMBODIA ECONOMIC UPDATE | JUNE 2021 EXECUTIVE SUMMARY 78.7 percent a decade ago. This is particularly affected borrowers engaged in the construction, crucial as current community outbreaks linger and tourism, and transport (and logistics) sectors the numbers of factories and firms being severely combined. As these sectors continue to be hit affected are rising. Such events are likely to further hard by lingering local outbreaks, demand for diminish the ability of businesses and households loan restructuring from the sectors will certainly to repay loans, putting the entire financial sector increase further. Non-performing loans are under increased stress. The authorities recently expected to rise from their current low levels of called on housing developers to accept delays 2.7 percent and 1.8 percent for the banking sector in mortgage payments. The total value of loans and microfinance sector, respectively, in 2020. and affected borrowers’ accounts that need to The central bank needs to continue to closely be restructured will likely increase further this monitor financial risks, focusing on liquidity year, from last year’s reported 285,000 accounts conditions, capital, and quality of credit together with a total of US$4.2 billion or 11.2 percent with the current macroprudential measures in of total outstanding credit of the banking and place as discussed in the monetary section in the microfinance sectors. Of the US$4.2 billion, main report. US$1.73 billion, or 41.5 percent, was provided to CAMBODIA ECONOMIC UPDATE | JUNE 2021 13 FIGURE ES.1: CAMBODIA’S RECENT DEVELOPMENTS AT A GLANCE Real growth is expected to recover this year... ...as goods (excluding gold) exports started to Real growth (percent) accelerate... (YTD, y/y, percent change) 30 Goods exports Historical average (10 years) GDP growth (baseline) 25 Historical average (5 years) 10�0 GDP growth (downside) 20 8�0 15 6�0 10 4�0 5 2�0 0�0 0 -2�0 -5 -4�0 -10 May-19 May-20 Mar-19 Jan-19 Mar-21 Jul-19 Nov-19 Jan-20 Mar-20 Jul-20 Nov-20 Jan-21 Sep-19 Sep-20 ...while strong FDI inflows continued... ... and gross international reserves increased (percent of GDP) further. (Months of imports) 4,000 16 GIR (months of prospective imports) FDI (US$ million) FDI (% of GDP, RHS) 12 3,500 14 Historical average (10 years) 10 3,000 12 2,500 10 8 2,000 8 6 1,500 6 4 1,000 4 2 500 2 - - 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 While easing, broad money growth remained ...but recent lockdowns disrupted domestic accommodative... activity. Broad money liabilities (y/y percent change) Cambodia’s Apple mobility trends index (percent) 60 YTD, y/y percent change 120 driving walking Historical average (10 years) 50 100 40 80 30 60 20 40 20 10 0 0 13-Apr-20 13-Jul-20 13-Apr-21 13-May-20 13-May-21 13-Oct-20 13-Feb-20 13-Feb-21 13-Jun-20 13-Sep-20 13-Mar-20 13-Dec-20 13-Mar-21 13-Jan-20 13-Aug-20 13-Nov-20 13-Jan-21 May-13 May-14 May-16 May-17 May-18 May-19 May-20 May-15 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-21 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Jan-20 Sep-20 Sources: Cambodian authorities; World Bank staff estimates and projections. Note: e = estimates; GIR=gross international reserves; p = projection; RHS = right-hand scale; YTD = year-to-date; y/y = year-on-year. 14 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Section I Recent Economic Developments and Outlook Recent Economic Developments and Outlook Recent Economic Developments and Outlook Recent developments Veng provinces. In April 2021, the authorities imposed lockdown in two largest urban centers-– Despite vigorous containment efforts, local Phnom Penh and Takhmao, second-most- outbreaks resurged populated city in Kandal province. Cambodia successfully contained the spread Coronavirus vaccination program has started of the coronavirus until the first quarter of 2021. It was among the countries with the The coronavirus vaccination program began fewest coronavirus cases in Asia, with just 1,753 on February 10, 2021, after the country obtained infections (of which 967 have fully recovered and 600,000 doses of the Sinopharm vaccine from three deaths) recorded as of March 22, 2021, after China on February 7. As of end-April 2021, there the first confirmed case was found on January have been 1.3 million doses administered (figure 2). 27, 2020.1 However, the country has recently During the same period, Cambodia received more experienced flare-ups of coronavirus infections than 4.0 million doses of coronavirus vaccine, of that could potentially cripple the country’s public which 324,000 doses were of Covishield, obtained through the COVAX facility, while the rest were health system. As of May 31, 2021, there were the Sinovac and Sinopharm vaccines from China. 30,094 cases and 214 deaths (figure 1). In response, In April 2021, the last shipment of 400,000 the authorities have intensified contact tracing by doses of Sinopharm arrived on April 28. Of a identifying all people that a COVID-19 patient has Cambodian population of more than 15 million, come in contact with, opened up new quarantine over 10.1 million are aged 18 and older and may facilities, increased the number of hospitals to need to be vaccinated under the current vaccine treat the rising number of coronavirus patients, availability for this age group. So, Cambodia needs and procured for additional medical equipment over 20 million doses of coronavirus vaccine. and ambulances. Among the most affected areas are the main urban centers which include Phnom A national COVID-19 vaccination strategic Penh, Kandal, Siem Reap, Sihanoukville and Prey plan was introduced in May 2021. Based on Figure 1: Coronavirus cases Figure 2: Vaccinations Figure 3: Cambodia’s mobility have surged accelerated Apple trends index (7-day moving average, Doses given per 100 deteriorated as of May 31, 2021) residents (percent as of May 16, 2021) 30,000 70 120 driving walking 25,000 60 50 100 20,000 40 80 15,000 30 60 10,000 20 40 10 5,000 0 20 Myanmar (5/13) Cambodia (5/24) Lao PDR (5/23) Thailand (5/24) - Singapore (5/17) Indonesia (5/24) Malaysia (5/24) Brunei (5/18) Vietnam (5/18) Philippines (5/24) 0 08/02/20 06/02/20 02/02/21 04/02/21 02/02/20 04/02/20 10/02/20 12/02/20 Source: Our World in Data. Source: Our World in Data. Source: Apple mobility trends, Apple. 1 Ministry of Health press release, November 5, 2020. 16 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Recent Economic Developments and Outlook their place of residence that has the highest occasional local outbreaks.2 Malaysia witnessed a population density, the heaviest concentration significant resurgence, while Myanmar, Mongolia, of non-farm activity, and the most economic and Thailand have seen more limited spurts significance, about 5 million people aged 18 and in infections. Of the countries in which the older (or 49 percent of the population in this virus raged a few months ago, the situation has age group) is prioritized to be vaccinated first improved in Indonesia and the Philippines, but under the plan. Of this group, 2.5 million people the number of cases remains high. The emergence residing in the capital city of Phnom Penh and of more transmissible variants of the virus, Kandal province will receive vaccinations in the however, poses new challenges to the containment first phase, the duration of which will be May to of the disease globally. mid-July 2021. The remaining 2.5 million people Economies in the East Asia and Pacific (EAP) under the prioritized group residing in the rest region have begun to bounce back. However, of the country will be vaccinated in the second among major economies in the region, only China (mid-July to September) and third (October to and Vietnam have followed a V-shaped recovery November 2021) phases, which cover 2.0 million path, with output surpassing pre-pandemic people and 0.5 million people, respectively. Under levels in the second half of 2020. Most of the the plan, all 5 million people are targeted to be other countries have not seen a full-fledged fully vaccinated within a period of seven months recovery in terms of either output or growth (May to November) with 10 million doses of momentum. By the end of 2020, the output in coronavirus vaccine. As of end-April 2021, about four major economies (Indonesia, Thailand, the 2.4 million doses of the vaccines have deployed, so, Philippines, and Malaysia) remained on average the plan should achieve an average of 1.1 million around 5 percent below pre-pandemic levels, with doses per month during May to November 2021 the smallest gap in Indonesia at 2.2 percent and to completely deploy the remaining 7.6 million the largest gap in the Philippines at 8.4 percent. doses. A masterplan for COVID-19 vaccination Global economic recovery (see box 1), supported published in March 2021 by the Ministry of Health in part by the significant U.S. stimulus, is expected aims to vaccinate 10 million people by mid-2022. to revive trade in goods and could provide A resurgence of community outbreaks an external boost to growth of as much as 1 triggered a countrywide travel restriction. percentage point on average, but global tourism Businesses, schools, colleges, and museums were is expected to remain below pre-pandemic levels temporarily closed during March and April 2021. until 2023, which delays economic recovery in A recovery of domestic demand, supported by tourism-dependent economies. gradually improving domestic consumption until Exports are gradually recovering, thanks to the first quarter of 2021 has been interrupted as revitalization of global demand domestic economic activity has once again been curtailed (figure 3), especially in the main urban Some countries have benefited from robust centers, which include, among others, Phnom global demand for the products in which Penh and the provincial capitals of Kandal, Siem they specialize. The recovery of global demand Reap, Sihanoukville, and Prey Veng provinces. will be further boosted by the U.S. stimulus package. Countries like China, Thailand, and Notwithstanding uneven containment, Vietnam did not simply ride the wave of economies of the region bounced back sustained demand for their exports but increased The coronavirus has proved difficult to their share in world exports of these products.3 suppress since the first case was confirmed in Supply disruption was not severe in these Wuhan in December 2019. China and Vietnam, countries, thanks to limited disease conditions. which had largely contained the disease, saw Merchandise exports of China and Vietnam 2 World Bank 2021a. 3 World Bank 2021a. CAMBODIA ECONOMIC UPDATE | JUNE 2021 17 Box 1: Global economic developments and outlook1 2 Global growth is gaining momentum despite the resurgence of COVID-19 in certain countries. Global Purchasing Managers’ Index indicators registered a broad-based increase in March, signaling a continued pickup in global growth momentum. The strong recovery of global manufacturing is supporting a recovery of goods trade. Air transportation has risen in the first few months of the year but remains 25 percent below its pre-crisis level. Global financing conditions continue to be favorable overall, with low credit spreads on corporate bonds restraining increases in private borrowing costs. Commodity prices have risen in 2021 with most now exceeding their pre-pandemic levels (figure B1.1). Nonetheless, COVID-19 cases are on the rise globally, with more infectious variants establishing themselves as dominant strains (figure B1.2). Global mobility declined in early April, as many countries moved to tighten pandemic restrictions. Following a sharp contraction in 2020, a stronger-than-expected global recovery is envisioned in 2021 supported by a large fiscal expansion in the United States. Growth in the East Asia and Pacific (EAP) region is projected to accelerate to 7.4 percent in 2021, led by a strong rebound in China. The recovery in the region excluding China is expected to be protracted and expand by 4.4 percent in 2021 on average, with significant cross-country variations. The projected growth would not be sufficient to fully undo the pandemic-related output losses in many regional economies, with output in many of them expected to remain below pre-pandemic levels until 2022. There is high uncertainty around the global growth forecast. The sustainability of the recovery depends on the duration of the pandemic, the effectiveness of policy actions in achieving widespread vaccination and preventing financial meltdowns and resuming global travel. The global recession would be deeper than the baseline forecast, if bringing the pandemic under control took longer than expected, or if financial stress triggered cascading defaults. Thus far, an extraordinary policy response has prevented the slowdown in activity from becoming a financial crisis. Nonetheless, financial conditions will remain fragile for many market participants. A prolonged disruption to economic activity could exacerbate financial stress, which could lead to widespread financial crisis. The pandemic is likely to have a durable impact through multiple channels, including lower investment, weak confidence, and erosion of human capital. The long-term damage related to the pandemic will be particularly severe in economies that suffered most from extended outbreaks of COVID-19 and the collapse of global tourism and trade and those that suffered financial crises (World Bank 2021 forthcoming). Figure B1.1. Commodity prices Figure B1.2. Global weekly new infections of COVID-19 Index, nominal term, 2010 = 100 Weekly new cases, millions Energy 6 140 Agriculture Metals&Minerals World 120 4 Countries with high 100 vaccination rate 80 2 60 40 0 Nov-20 Apr-20 Apr-21 Oct-20 Mar-20 Mar-21 Aug-20 Dec-20 May-20 Feb-20 Jun-20 Jan-21 Jan-20 Sep-20 20 Mar-13 Mar-15 Mar-17 Mar-19 Mar-21 Source: Haver Analytics; World Bank. Source: Bloomberg; World Bank; World Health Organization. Note: Last observation was March 2021. Note: Red line indicates aggregated weekly new infections of COVID-19 for countries in which, on April 25, more than 20 percent of the population had received at least one dose of vaccine. 1 This box was prepared by Ekaterine Vashakmadze, Prospects Group. 2 Draws on the WB January Global Economic Prospects (GEP) report and April 2021 EAP update. The updated global forecasts will be published in the June 2021 GEP. 18 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Recent Economic Developments and Outlook accelerated quickly, surpassing their pre-pandemic (figure 6). This helped maintain a 16.7 percent growth rates (figure 4). Vietnam’s exports have year-on-year growth rate of Cambodia’s (recorded) performed exceptionally well, especially to the merchandise exports in 2020, if gold exports United States, in part due to the trade diversion were included. While having a relatively small effect resulting from U.S.-China tensions.4 share of 3.2 percent of total merchandise exports China and Vietnam are expected to grow (excluding gold), exports of electrical parts, wire strongly in 2021—by 8.1 percent and 6.6 percent, and accessories, and vehicle parts reached US$456 respectively—while the rest of the region is million, growing at 18.1 percent in 2020. Exports expected to grow by only 4.4 percent. Conversely, of bicycles also accelerated, reaching US$527 countries with the weakest performance were the million, expanding at 27.7 percent in 2020. ones that depend on earnings from tourism rather Goods exports have recovered. Merchandise than exports of manufactured goods, especially (excluding gold) exports grew at 12.2 percent electronics. in the first four months of 2021. Despite rising Cambodia’s merchandise exports have shipping costs, exports of GFT products, which adapted to changes in external demand bottomed out in January 2021, contracting by conditions and the share of garment exports 13.2 percent y/y, have recovered since, growing in total goods (excluding gold) exports declined at 10.2 percent and 27.8 percent in March and to 45.6 percent in the first 4 months of 2021, April 2021, respectively. Exports of bicycles grew down from 52.2 percent in 2020 (and 57.6 percent at 32.3 percent during the first four months of in 2019) (figure 5). Exports of garments (and 2021, compared to 27.8 percent in 2020. During textiles) no longer accounted for the majority of the same period, combined vehicle, electrical, and Cambodia’s goods exports as of April 2021. electronic parts exports grew by 16.4 percent and As the country’s goods exports adjusted, the 18.2 percent, respectively. decline in GFT goods exports in the second Cambodia’s manufacturing exports to the and third quarters of 2020 was partly offset United States rose by rising exports of agricultural commodities, processed agricultural products, newly emerging The United States (U.S.) remained Cambodia’s manufactured products (electrical, electronic, and number one export market which continued vehicle parts, including bicycles), and the rest to expand in 2020. The U.S. market captured Figure 4: Goods exports in the Figure 5: Declining share of Figure 6: Cambodia’s exports1 region accelerated1 garment exports in recovered (YTD, y/y percent total goods (excluding (contribution to export change) gold) exports growth, percentage (percent) point) 70 Other products Agriculture & processing Agriculture & processing Footwear & travel goods Vietnam Cambodia Electrical & vehicle parts Footwear & travel goods Electrical & vehicle parts Garments & textiles 60 Thailand China Garments & textiles 40 Other products 50 100 30 40 20 30 10 20 0 10 50 -10 0 -20 -10 -30 -20 0 Mar-20 Mar-21 Sep-20 Dec-20 Jan-20 Jan-21 Apr-21 Apr-20 Aug-20 Nov-20 Jul-20 Feb-20 May-20 Feb-21 Oct-20 Jun-20 Mar-20 Sep-20 Mar-19 Sep-19 Nov-20 Jan-21 Mar-21 Nov-19 Jan-20 Jan-19 Jul-20 May-20 Jul-19 May-19 Mar-20 Mar-21 Sep-20 Jan-20 Nov-20 May-20 Jul-20 Jan-21 Source: Haver Analytics. Source: Cambodian authorities. Source: Cambodian authorities. Note: 1. Cambodia’s exports exclude gold Note: 1. Cambodia’s exports exclude gold exports; YTD =year-to-date. 4 World Bank 2021a. CAMBODIA ECONOMIC UPDATE | JUNE 2021 19 Recent Economic Developments and Outlook 36.7 percent of total GFT exports in 2020, up Cambodia’s exports to the EU)7 is mainly behind from 31.9 percent in 2019. Total GFT exports the sharp decline of Cambodia’s exports to the to the U.S. market rose to US$3.5 billion or 3.6 market. Similarly, while Cambodia’s exports of percent y/y increase, boosted in part by the bicycles to the U.S. market doubled, reaching duty (and quota) free access provided by the US$147 million in 2020, bicycle exports to the EU U.S. Generalized System of Preferences (GSP) market declined by 3.9 percent, reaching US$275 program. The GSP program, granted in 2016, million. has boosted Cambodia’s exports of travel goods such as luggage, backpacks, handbags, and FDI inflows started to recover wallets.5 However, legal authorization for the GSP Attracted by the newly signed free trade program expired on December 31, 2020, and is agreements, the value of approved projects pending U.S. congressional approval.6 in the real sector financed by FDI expanded. In contrast, total GFT goods exports to the The expansion underpinned a diversification of EU market fell significantly, contracting by FDI projects, which were earlier concentrated 35 percent, reaching only US$2.6 billion in largely in the construction and real estate sector 2020. The E.U. market accounted for 27.5 percent to the energy, healthcare, telecommunication, of combined GFT exports, down from 38.2 garment, travel goods, and agriculture sectors percent in 2019 (and 42.6 percent in 2018). The (including agroprocessing industries), adjusting combined EU and UK market accounted for 34.9 to changes in domestic economic and external percent of total GFT exports, remaining below demand conditions. The tourism sector, however, the share of the U.S. market of 36.7 percent. The continued to receive a relatively large portion of negative impact of the pandemic and the partial (approved) FDI projects. In 2020, total approved withdrawal of the EU’s Everything But Arms project (fixed asset) value financed by FDI in preferential treatment, effective since August Cambodia’s real sector rose to US$3.6 billion, or a 12, 2020 (affecting approximately 20 percent of 4.3 percent year-on-year increase (figure 7). China Figure 7: Approved FDI project Figure 8: Rising FDI projects Figure 9: FDI inflows to value expanded going to Cambodia and (YTD, y/y percent non-garment Vietnam followed a change) industries similar trend (US$ billion) (3mma, y/y) 250% 3�0 Cambodia Vietnam (RHS) 200% 2�5 1400% 160% 2�0 1200% 140% 150% 1�5 120% 1000% 100% 1�0 100% 800% 80% 0�5 60% 50% 0�0 600% 40% Agriculture & food processing Tourism Agriculture & food processing Tourism Agriculture & food processing Tourism Wholesate/retail Garment Wholesate/retail Garment Wholesate/retail Non-garment manufacturing Garment Non-garment manufacturing Non-garment manufacturing Construction and real estate Construction and real estate Construction and real estate Mining Mining Mining 400% 20% 0% 0% 200% -20% -50% 0% -40% -200% -60% -100% Sep-19 Sep-20 Sep-17 Sep-18 Sep-14 Sep-15 Sep-16 Mar-19 Mar-20 Mar-17 Mar-18 Mar-14 Mar-15 Mar-16 Dec-19 Jun-20 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-20 Dec-20 Dec-19 Aug-20 Apr-19 Aug-19 Apr-20 Feb-21 Feb-20 Oct-20 Oct-19 Jun-19 Jun-20 2018 2019 2020 Source: Cambodian authorities. Source: Cambodian authorities. Source: Cambodian authorities and Haver Note: YTD = year-to-date. Analytics. Note: RHS = right-hand scale; 3mma = 3-month moving average. 5  Seehttps://kh.usembassy.gov/duty-free-access-travel-goods-made-cambodia/ 6 See https://www.cbp.gov/trade/priority-issues/trade-agreements/special-trade-legislation/generalized-system-preferences 7 For more details, please see https://trade.ec.europa.eu/doclib/press/index.cfm?id=2113. 20 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Recent Economic Developments and Outlook continued to account for about half of total and 3.0 percent, respectively of FDI stock as (approved) FDI project value. of 2019.8 About 60 percent of FDI inflows to Vietnam go to manufacturing, followed by real In 2020, FDI inflows appeared to consist largely estate activities (16.0 percent), and electricity, gas, of “forward-looking” projects, targeting steam and air conditioning supply (6.1 percent). short- to medium-term investment returns. Nevertheless, FDI inflows to both Cambodia This reflects the reality that the pandemic lingers. and Vietnam appear to follow a similar trend So, quick return projects such as those invested in (figure 9), likely reflecting external demand the retail, wholesale, and real estate sectors did not conditions underpinning foreign investors’ receive much attention. The largest component of decision to invest in emerging economies. approved FDI project value in 2020 went to the tourism sector (a five-star hotel, a theme park and Challenges in investment climate reforms a trade center), accounting for US$1.75 billion, remained although the tourism sector has been hit hard by Besides changes in trade policy, changes the pandemic. The second-largest component of in the efficiency with which goods can be approved FDI project values went to the “non- produced are likely to lead to changes in the garment” industries, accounted for US$1.36 billion composition of goods that a country exports (figure 8). They comprised mainly energy, including (and imports).9 Cambodia and Vietnam are both renewable energy (US$588 million), healthcare members of the World Trade Organization (WTO) (US$358 million), and telecommunication and Association of Southeast Asian Nations (US$102 million). The garment sector was (ASEAN), and have maintained relatively liberal next, receiving US$220 million, followed by the trade policies. Vietnam has, however, succeeded in agriculture and agroprocessing sectors (US$110 improving the efficiency as reflected in a relative million). Approved FDI project value going to high ease of doing business ranking which means the construction and property sector plummeted, the regulatory environment in Vietnam is more accounting for only US$140 million in 2020, down conducive to the starting and operation of firms from US$1.79 billion in 2019. and businesses. In 2020, Vietnam’s doing business As discussed, Cambodia’s manufacturing ranking was 70th and Cambodia’s was 144th (out exports remained heavily reliant on the of 190 countries).10 Lowering barriers to firm garment industry, which for decades has largely entry and a favorable environment attract new engaged in the “cut-make-trim” process, the investment. Streamlining rules and regulations lowest value-added section of the entire value relating to exports, while reducing transports, chain. In contrast, Vietnam has been able to customs, ports, and administrative costs underpins rapidly diversify its manufacturing export base trade growth and export diversification. In and more importantly, it has successfully moved 2018, Vietnam ranked 39th and Cambodia 98th up to high-value-added electronics exports (see (among 160 countries) on logistic performance also box 2). While China continued to account indexes.11 for about half of total FDI inflows to Cambodia, Construction continued to be subdued due to Chinese FDI covers only 11 percent of total FDI excess supply inflows to Vietnam. Vietnam has a long list of main FDI country origins. In addition to China, For several years preceding the pandemic, Republic of Korea, Japan, Singapore, Taiwan Cambodia experienced an unprecedented (China), the British Virgin Islands, Malaysia, and construction and real estate boom, which Thailand account for 18.7 percent, 16.3 percent, created excess supply. External demand 13.7 percent, 8.9 percent, 6.0 percent, 3.5 percent, for the country’s commercial and residential 8 Foreign direct investment projects licensed by main counterparts (accumulation of projects having effect as of December 31, 2019) by main counterparts (General Statistical Office of Vietnam). 9 Kehoe and Ruhl (2003): How Important Is the New Goods Margin in International Trade? Federal Reserve Bank of Minneapolis Research Department Staff Report 324. 10 See World Bank Doing Business report at https://www.doingbusiness.org/en/data/exploreeconomies/cambodia 11 See more detailed logistic performance index at https://lpi.worldbank.org/international/aggregated-ranking CAMBODIA ECONOMIC UPDATE | JUNE 2021 21 Box 2: Factors behind Vietnam’s robust economy growth Vietnam was one of only a few economies that grew during the pandemic. Vietnam’s GDP expanded at 2.9 percent in 2020, due to exceptional resilience in Vietnam’s export and domestic sectors, although this growth performance was significantly lower than the 7 percent growth rate in 2019. During the two decades prior to the pandemic, the country experienced a more than tenfold increase in share of exports of electronics and machinery (computers, electronics, telephones, mobile phones, still image and video camaras, machinery, equipment, tools, instruments, other means of transportation, and insulated wire and cables), rising to 60.3 percent of total merchandise exports (US$146 billion) in 2018, up from 5.9 percent of total merchandise exports (US$3.6 billion) in 2008 (figure B2.1). This allowed Vietnam to weather the COVID-19- induced global demand shock. In contrast, Cambodia’s exports continue to be heavily dependent on low-value-added garment products although they no longer accounted for the majority of goods exports as of April 2021. (figure B2.2). While the country has a well- established, labor-intensive, and export-oriented garment industry, the manufacturing sector has, as mentioned, for decades remained largely engaged in the “cut-make-trim” process, the lowest value-added section of the entire value chain. Cambodia’s narrow export base was hit hard by external demand shocks in 2020. Cambodia’s real growth contracted by 3.1 percent in 2020, plunging the economy into a recession for the first time in three decades. While exports of most countries in the region plummeted due to the pandemic, Vietnam’s successfully diversified exports performed exceptionally well, especially those to the United States, due in part to the trade diversion effect resulting from U.S.-China tensions (figure B2.3). In 2021, Vietnam’s economy is set to grow 6.6 percent on the back of strong performance by export-oriented manufacturing, and a robust recovery of domestic demand. To reach upper middle-income status by 2030, Vietnam’s development model is set to change to a knowledge- based, digitalized, green economy. In the transition years, the country will need to see major investments in human capital, innovation, and green infrastructure to increase productivity, pursuing an even more resilient and knowledge-based economy. Vietnam is committed to: (i) improving the quality of market-economy institutions and governance; (ii) developing human capital, science, technology and innovation; (iii) further integrating into the global economy; and (iv) continuing to improve the transport, energy and IT infrastructure and green and resilient megacities. Cambodia’s economy is projected to recover, expanding modestly at 4 percent in 2021. However, Cambodia’s growth model—characterized by a narrow export base with a high concentration of products and markets, masked by a pre-crisis surge in capital inflows which fueled a construction and real estate boom may no longer be sustainable in the short to longer term. Unless the country’s structural weaknesses are addressed, the economy will likely follow a new trajectory (a new normal), expanding only moderately in the post-pandemic world. Figure B2.1. Vietnam’s exports Figure B2.2. Cambodia’s exports Figure B2.3. Driven by electronics, diversified, consisting largely of remain heavily dependent on Vietnam’s exports performed very high-value-added products garments well Contribution to exports growth (percentage point) Electronics exports (% of total) Garments (% of goods exports) 90 Electronics, machinery, and equipment Total goods exports (y/y, percent change, RHS) Textiles and garments Electronics exports (y/y, percent change, RHS) 80 Fishery products Toys/sports requisites 70% 120% 70 60% Furniture 60 Other 60% 100% 40% Total 50% 80% 50 20% 40% 60% 40 30% 40% 30 0% 20 -20% 20% 20% 10 10% 0% -40% 0 Jul-19 Jul-20 Sep-19 Sep-20 Jan-19 Mar-19 Jan-20 Mar-20 Jan-21 May-19 Nov-19 May-20 Nov-20 0% -20% Apr-21 2017 2010 2011 2012 2013 2014 2015 2016 2018 2019 2020 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Haver Analytics. Source: Haver Analytics. Source: Haver Analytics. Note: RHS = right-hand scale. 22 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Recent Economic Developments and Outlook property partly contributed to the boom. When real estate industry expects supply and average the pandemic hit together with lockdowns and property prices to slip further in 2021,13 while tightened international travel restrictions including a recovery in the demand for commercial and a required 14-day quarantine period among others, residential property will likely take time, as it is external demand was interrupted, and most dependent on the return of external demand, FDI-financed property investment, especially given Cambodia’s relatively small domestic market. in high-rise development projects in the urban Relaxation of international travel restrictions centers such as Phnom Penh and Sihanoukville, and the eventual lifting of the compulsory  14- was suspended. Although a small segment of the day quarantine, once community outbreaks are housing market–-low and affordable residential under control, may pave the way for the return of property–-remains resilient, evidence of a subdued foreign demand, which should help to once again property market is mounting, and real estate prices propel the property market. However, it is unclear have been declining (figure 10). Condominium how long external demand will last, if returns, prices have been hit particularly hard.12 In 2020, given the limited opportunities for a good return depressed construction activity was reflected on investment for holding property in Cambodia. in the decline in the country’s imports of steel, (Sihanoukville, experienced a rapid construction cement, and other basic construction materials. boom during 2017–19, with an influx of Chinese The value of steel, and cement imports mainly investment due to a prospect of a high investment used for the construction industry contracted by return from tourism activities backed by a short- 34.5 percent and 48.6 percent, respectively, year- lived casino industry.) on-year in 2020 (figure 11). Agricultural production remained resilient Excess supply may have resulted in lower foreign investor appetite for investing in Total rice production expanded, thanks property development projects. Consequently, to improved dry season rice production the value of approved construction permits during the 2020–21 rice production year. The plummeted, contracting by 63.8 percent in 2020 cultivated (and harvested) area of dry season (figure 12), while approved construction area (in rice rose to 0.65 million hectares or a 9.0 percent square meters) declined by 24.3 percent. The increase in 2020 (figure 13). In addition, the yield Figure 10: Real estate prices Figure 11: Basic construction Figure 12: Approved construction declined materials imports permits declined (US$ per square meter) contracted (y/y percent change) (y/y percent change) Cement Cooling equipment Prime office rents 100 350 Prime retail rents Steel Other materials Prime condo sales prices (RHS) 300 50 3,500 250 Value Area 3,000 50 40 200 2,500 150 30 2,000 0 100 20 1,500 50 1,000 0 10 -50 500 -50 0 0 -100 -100 2018 2019 2020 2018 2019 2020 Source: CBRE, Cambodia. Source: Cambodian authorities. Source: Cambodian authorities. Note: RHS = right-hand scale. 12 See https://www.globalpropertyguide.com/Asia/Cambodia/Price-History 13 2021 Fearless Forecast–Recession or Resurgence, CBR, Cambodia. See https://images.cbre.com.kh/2021/02/2021_Fearless-Forecast_For-Circulation. pdf. CAMBODIA ECONOMIC UPDATE | JUNE 2021 23 Recent Economic Developments and Outlook of dry season rice also improved, reaching 4.5 Cambodia’s major crop, and value added of crop metric tons per hectare or a 2.2 percent increase production accounted for 57.4 percent of the in 2020. As a result, last year’s dry season rice country’s agricultural GDP in 2020. production rose to 2.93 million metric tons or a Domestic price volatility affected agricultural 12.1 percent increase. Wet season rice production, production however, remained subdued due to unpredictable weather conditions. Notwithstanding efforts to Domestic agricultural commodity price expand the cultivated area of wet season rice to volatility remains a challenge to the 2.79 million hectares or a 2.2 percent increase agriculture sector, especially for (non-rice) in 2020, mid-season drought and end-season agricultural products. While the agriculture floods caused the harvested area to decline by 3.0 sector has been benefiting from increased labor percent. Wet season rice production, therefore, availability and additional investment, agricultural dropped to 8.22 million metric tons or a 0.6 commodity price volatility, especially non-rice percent year-on-year contraction in 2020. Thanks agricultural products produced for the domestic to the increase in production of dry season rice, market, remains a critical constraint as do total rice production rose to 11.15 million metric higher electricity and logistics costs. Agricultural tons or a 2.4 percent increase in 2020. While the production in Cambodia often faces under- or cultivated (and harvested) area of dry season has oversupply of products caused by seasonal steadily increased with efforts to expand the dry factors and poor market diversification.14 Weather season irrigation system, the yield of dry season conditions can be one of the biggest challenges: rice continues to fluctuate (figure 14), which favorable weather can lead to oversupply, whereas likely indicates the continued challenges in using unfavorable weather can lead to undersupply. modern agricultural inputs and applying new Given Cambodia’s relatively small domestic cultivation technologies. In contrast, the yield market, and the collapse of the tourism sector, of wet season rice has been less volatile and has volatile retail agricultural prices amplify (figure gradually improved, reaching 3.1 metric tons per 15) and hurt overall (non-rice) agricultural hectare or 70.3 percent of dry season rice’s yield production. The authorities have made further in 2020, up from 2.5 metric tons per hectare or 63 efforts to address this issue by establishing percent of dry season rice’s yield in 2008. Rice is farmer organizations, geographical identification Figure 13: Wet season rice Figure 14: Dry season rice yields Figure 15: Domestic agricultural production was fluctuated commodity prices subdued (y/y percent change) were volatile (y/y percent change) (y/y percent change) 35 Cultivated area (dry season) Wet/dry season rice yield (%, RHS) 15 60 Production (dry season) Wet season 10 0�8 Cultivated area (wet season) Dry season 10 40 25 Production (wet season) 5 0�7 5 20 0 0�7 15 0 0 -5 0�6 Rice Maize -5 -20 Banana Mango 5 -10 0�6 Rubber (SGP/MYS, RHS) -10 -40 -15 0�5 Jul-20 Jul-19 Jan-21 Jan-20 Jan-19 Sep-20 Sep-19 Mar-20 Dec-20 Mar-19 Jun-20 Jun-19 Feb-20 Apr-20 Oct-20 Feb-19 Aug-19 Oct-19 Dec-19 Feb-21 May-20 Aug-20 Apr-19 May-19 Nov-20 Nov-19 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2008 -5 2017 2018 2019 2020 Source: Cambodian authorities. Source: Cambodian authorities. Source: Cambodian authorities and the Note: RHS = right-hand scale. World Bank. Note: RHS = right-hand scale. 14 Sreymom and Pirom. 2015. 24 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Recent Economic Developments and Outlook agricultural products, expanding contract farming, both working capital and investment or business and linking agricultural commodity producers expansion. Agriculture including agroprocessing, with major food wholesalers and retailers in major food manufacturing and processing, is one of urban centers, underpinning the (domestic) food the priority sectors. The BRGS acts as collateral/ supply chains.15 A feasibility study on establishing security for 70 to 80 percent of the loan amount ago-industrial parks has been conducted. borrowed by businesses from the participating financial institutions; thus, reducing the physical The CCFTA is expected to boost agricultural performance collateral required from borrowers. The credit guarantee scheme offered by CGCC will The prospects of Cambodia-China Free Trade complement the existing loan facility provided Agreement (CCFTA), which may go into effect by the Agricultural and Rural Development Bank this year, help further boost investment, and to improve access to finance for the agriculture thus support overall agricultural production sector. for exports, especially to the Chinese market. This helps reduce the constraints the sector is Rising ocean freight rates slowed Cambodia’s facing due to Cambodia’s small domestic market. milled rice exports China has already granted its import quota Cambodia’s milled rice exports were struck for Cambodia’s (milled) rice exports of up to by a surge in shipping costs as a temporary 400,000 tons a year since 2019. China is already container shortage occurred. According to Cambodia’s top milled rice exports market (see the Cambodia Rice Federation, the shortage below for more details on milled rice exports). pushed up the cost of empty 20-foot and 40-foot In addition, new agricultural commodities such containers several times in December 2020 and as mangos and bananas have already emerged. January 2021. The temporary container shortage In 2020, Cambodia earned US$112 million or a affected rice exports, especially to Europe. Exports 128 percent increase from banana exports alone. of agricultural commodities, especially rice, which The first direct shipment of fresh mangos from is heavier and cheaper cargo, compared to other Cambodia to China took place in May 2021, after products such as garments and electronics, were Chinese Customs certified 37 mango plantations hard hit by rising ocean freight rates. As a result, and five packaging factories on April 26, 2021. during the first quarter of 2021, milled rice exports Cambodia and China signed a phytosanitary contracted by 33.4 percent, reaching only 153,000 protocol for fresh mango exports to China in metric tons. While the trade safeguard measures June 2020.16 imposed by EU on Cambodian rice will end in The first state-owned credit guarantee January 202218, saving rice exporters €125 per corporation was established ton, high ocean freight rates will likely continue. According to the Cambodia Rice Federation, In March 2021, the Guarantee Corporation ocean freight rates stood at US$150 to US$250 of Cambodia Plc (CGCC), the first state-owned per ton in May 2021, compared to US$40 to credit guarantee corporation, with initial US$50 per ton in 2020. capital of US$200 million, was established.17 The CGCC has launched the Business Recovery In 2020, Cambodia exported 690,000 metric Guarantee Scheme (BRGS) which is its first tons of milled rice (of which 80 percent was credit guarantee scheme. The BRGS aims to jasmine rice) and earned US$538 million. China support businesses including (micro) small and is the largest market, capturing 41.8 percent of medium-sized enterprises (SMEs) and large the total, up from 35.5 percent in 2019. In the first firms to enhance their access to formal loans for three months of 2021, China’s market expanded 15 Contract farming in Cambodia increased in 2020; see https://www.phnompenhpost.com/business/hope-sprouting-growers-more-farming-contracts- inked and https://www.phnompenhpost.com/business/fifty-nine-communities-enter-agri-contracting 16 Chinese Embassy Facebook. 17 Guarantee scheme corporation of Cambodia; https://www.cgcc.com.kh/ 18 The European Union imposed safeguard measures on rice from Cambodia. On January 18, 2019, the European Union reinstated the normal customs duty on Cambodia’s rice products of €175 per ton in year one, progressively reducing it to €150 per ton in year two, and €125 per ton in year three; see https://trade.ec.europa.eu/doclib/press/index.cfm?id=1970. CAMBODIA ECONOMIC UPDATE | JUNE 2021 25 Recent Economic Developments and Outlook further, capturing 55.5 percent of Cambodia’s entirely on domestic tourism. In 2020, more than milled rice exports. The EU market (including a million local tourists visited attractions (coastal, the U.K., Norway, Ukraine, and Serbia) is second. cultural, and ecotourism zones) in the country Regardless of the imposition of EU safeguard during each major holiday, such as the Cambodian measures, the country’s rice exports to the EU New Year, Pchum Ben, and the Water Festival, market marginally improved, reaching 203,000 in the absence (or limited number) of foreign metric tons, or 30 percent of total exports in 2020. tourists. As of end-March 2021, Free On Board (FOB) International arrivals by air to Siem Reap, average prices of Cambodia’s premium fragrant (Malys Angkor), standard fragrant, and long-grain where the Angkor Temple Complex is white rice remained favorable, capturing US$820 located, contracted by 56.6 percent, receiving to US$1,350, US$730, and US$540 to US$920 per only 0.7 million foreign tourists in 2020. Given metric ton, respectively. the fact that the Angkor Temple Complex is the most popular destination in the country, the An unprecedented lockdown caused further negative impact has been economically damaging. detriment to the tourism industry Consequently, revenue from entrance fees to The recent unprecedented lockdown has the Complex, which reached more than US$100 further hurt domestic economic activity, million in the precrisis period, plummeted to which has lately depended almost entirely US$18.6 million, or an 81.2 percent y/y decline. on local demand after the collapse of The coronavirus pandemic and local outbreaks international arrivals. As of December 2020, are likely to continue for some time. Therefore, international arrivals contracted by 80.2 percent the services sector, in particular, the tourism, year-on-year, reaching 1.31 million (figure 16). hospitality, retail, and transport industries, may be During March–April 2021, domestic travel experiencing the longest decline in Cambodia’s restrictions and a lockdown were put in place due recent history. During the pre-pandemic period, to the resurgence of community outbreaks of the tourism sector was one of main drivers of COVID-19. People were advised to stay home. growth. According to the Ministry of Tourism, As a result, the tourism, hospitality, retail, and tourism receipts accounted for 12.1 percent of transport industries have been hit hardest, given GDP, while the sector provided 630,000 direct that the industries until recently depended almost jobs in 2019. Figure 16: International arrivals Figure 17: Imports of consumer Figure 18: Inflation was further and Angkor revenue goods slowly subdued collapsed recovered (Contributions to (YTD, y/y, percent (y/y, percent change) 12-month inflation change) (percent) Foodstuff Motorcycles 100 Others Passenger cars Diesel 80 Transport sub-index 30 Gasoline 10 Housing & utilities sub-index 60 Food sub-index 40 20 Headline inflation (y/y) 20 10 5 0 0 -20 -10 -40 Total -20 0 -60 Siem Reap -30 -80 Entrance revenue -100 -40 -5 -50 Jul-20 Jul-17 Jul-18 Jul-19 Jan-18 Jan-20 Jan-19 Sep-20 Sep-17 Sep-18 Sep-19 Mar-18 Mar-20 Mar-19 May-20 May-19 Nov-17 Nov-18 Nov-19 Nov-20 May-18 Jul-20 Jul-18 Jul-15 Jul-16 Jul-17 Jul-13 Jul-14 Jul-11 Jul-12 Jul-19 Jan-20 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-12 Jan-13 Jan-14 Jan-11 Jan-21 Source: Cambodian authorities. Source: Cambodian authorities. Source: Cambodian authorities. 26 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Recent Economic Developments and Outlook Subdued consumption was further hit by the of Cambodia’s consumer price index, ranging recent lockdown from rice, beef, chicken, and fish to vegetables and fruit. Retail prices of petroleum products Despite a relatively low number of coronavirus such as gasoline and diesel, however, edged up. cases in 2020, domestic consumption In February 2021, the contribution of the food remained weak. In 2020, growth of imports of and non-alcoholic beverage subindex to inflation consumer goods and durable goods continued to declined to 1.4 percentage points, from 2.59 be subdued and remained in negative territory. percentage points during the same period in Domestic consumption was further hit by rising 2020, while the contribution of the housing (and cases of coronarius in April 2021. As a result, utilities) and transport subindexes to inflation imports of foodstuff contracted by 45.3 percent increased to 0.22 percentage points and a negative in the first four months of 2021, down from a 0.05 percentage points, respectively, up from 0.16 4.9 percent contraction in 2020 (figure 17), while percentage points and a negative 0.4 percentage imports of gasoline contracted by 12.2 percent points, respectively (figure 18). and 24.4 percent, respectively. Similarly, imports of durable goods such as passenger vehicles and Stable exchange rates helped anchor domestic motorcycles contracted by 25.8 percent and 28.7 retail prices denominated in local currency. percent, respectively, in the first four months Nominal values of the Cambodian riel vis- of 2021. In 2020, when travel restrictions and à-vis the U.S. dollar remained broadly within the lockdown were lifted, after the first wave the targeted ±2 percent range (figure 19). The of COVID-19 outbreaks hit Cambodia in April exchange rate remained broadly stable, reaching 2020, domestic economic activity returned, riel 4,072 per U.S. dollar at the end of May 2021, according to the findings of the Business Pulse compared to riel 4,070 per U.S. dollar during the Survey. Businesses reopened in June 2020, and same period last year. In addition, nominal values by September 2020, 89 percent were open (see of the Cambodian riel vis-à-vis the Thai baht, November 2020 Cambodia Economic Update). Vietnamese dong, and Chinese yuan were also While more recent data are not available, it is likely stable. This has helped anchor prices of imported that at least part of the gains reported in 2020 by products, including those from Cambodia’s the Business Pulse Survey may have been reversed, neighbors, which are its main import partners. after the unprecedented lockdown was introduced A surge in nontraditional exports partly in April 2021. However, contraction in imports helped stabilize the external position of consumer and durable goods moderated during the first four months in 2021. Domestic In 2020, Cambodia’s external position was consumption may be gradually recovering. As stable, thanks in part to an increase in non- consumption accounts for about 70 percent of traditional exports. Exports of goods (including GDP, its recovery underpins economic growth. gold) rose to US$17.2 billion or 16.7 percent in 2020. These exports included gold, agricultural Inflation eased further as food prices commodities, bicycles, electrical parts, wire and decelerated accessories, vehicle parts and other exports. As food prices eased, headline inflation Gold exports skyrocketed to US$3.1 billion in declined further, dropping to 1.7 percent 2020. Goods (excluding gold) exports marginally y/y in February 2020, down from 2.9 percent declined to US$14.5 billion, contracted by 1.1 at the end of 2020. In February 2021, the percent in 2020. As discussed, Cambodia’s exports decline in the food subindex was largely behind of traditional products such as GFT products, the easing of headline inflation, while housing, have been affected by the global demand shock. utilities, transport, and other subindexes remained At the same time, merchandise imports were subdued. In February 2021, food prices (except constrained as imports of durable goods and for pork) eased across the food inflation basket construction materials dipped significantly as CAMBODIA ECONOMIC UPDATE | JUNE 2021 27 Recent Economic Developments and Outlook consumption eased and the construction boom Monetary policy easing continued stalled. As a result, the current accounts are The central bank continues to support estimated to have remained at 9.9 percent of liquidity. The National Bank of Cambodia GDP in 2020, compared to 9.7 percent of GDP decided in its Monetary Policy Committee in 2019. The deficit is estimated to have been fully meeting held on February 10, 2021 to: (i) continue financed by FDI inflows. to maintain exchange rate stability via its exchange Resilient FDI inflows fully financed the market intervention; (ii) provide riel liquidity via current account deficit. In 2020, FDI inflows Liquidity-Providing Collateralized Operation which reached US$3.4 billion or 13.6 percent of facilities according to the riel exchange rate and GDP, compared to US$3.5 billion 13.2 percent of liquidity conditions; and (iii) maintain a reserve GDP in 2019, helped sustain the external sector requirement ratio at 7 percent for both riel and (figure 20). Net worker remittances, however, U.S. dollar deposits and borrowings until the end contracted by 13.5 percent in 2020. Cambodia’s of the first semester of 2021, and as necessary. stable external position allowed the central bank to Subsequently, in May 2021, the central bank further accumulate international reserves. Gross issued (its third round) monetary easing measures international reserves rose to US$21.2 billion by to: (i) maintain a reserve requirement ratio at 7 the end of 2020 or 13.1 percent, equivalent to percent for both riel and U.S. dollar deposits and more than 10 months of prospective imports. borrowings until further notice; and (ii) allow the Underpinned by continued capital inflows, foreign banking and microfinance sectors to continue exchange reserves, which constitute the majority to restructure loans until the end of 2021,19 of Cambodia’s gross international reserves, In 2020, the central bank also postponed full expanded in 2020. (figure 21). implementation of the capital conservation buffer to maintain the 50 percent current requirement.20 In March 2020, the central bank issued a directive to all banks and financial institutions to restructure Figure 19: Nominal exchange Figure 20: FDI inflows were Figure 21: Gross international rate was broadly broadly stable reserves rose stable, within a ±2 (% of GDP) (US$ billion) percent range (riel per U.S. dollar, y/y percent change) 2�5 FDI (US$ million) Gross international reserves 2�0 4,000 FDI (% of GDP, RHS) 16 y/y percent change, RHS 25 40 Historical average (10-year average, RHS) 1�5 3,500 14 1�0 20 3,000 12 30 0�5 2,500 10 15 0�0 -0�5 2,000 8 20 -1�0 10 1,500 6 -1�5 10 1,000 4 5 -2�0 500 2 -2�5 0 0 Mar-21 Mar-14 Sep-17 Dec-15 Aug-20 Aug-13 Nov-18 Jan-20 Jul-16 - - Jan-13 May-15 Apr-18 Oct-14 Feb-17 Jun-19 Sep-17 Sep-18 Sep-19 Sep-20 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 May-17 May-18 May-19 May-20 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Cambodian authorities. Source: Cambodian authorities. Source: Cambodian authorities. Note: RHS = right-hand scale. Note: RHS = right-hand scale. 19 See May 21, 2021, announcement on policy easing measures (3rd round) by the National Bank of Cambodia. 20 The capital conservation buffer is designed to ensure that institutions build capital buffers under normal financial situations that can be drawn down when losses occur. See the Prakas dated February 22, 2018, and the National Bank of Cambodia’s 2020 Semi-Annual Report. See https://www.nbc.org.kh/ download_files/legislation/prakas_eng/3.Prakas_on_Capital_Buffer_in_BFIs_ENG.pdf. 28 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Recent Economic Developments and Outlook loans in order to maintain financial stability, other deposits) accounted for 11.7 percentage while easing the burden of debtors facing major points, while transferable deposits and currency in revenue declines caused by the pandemic.21 In circulation contributed only 2.2 percentage points 2020, to mitigate the impact of the pandemic on and 1.3 percentage points, respectively (figure 22). borrowers, the banking and microfinance sectors Domestic credit and deposit growth stabilized restructured 285,000 loan accounts, amounting as confidence improved to US$4.2 billion.22 Loan restructuring measures continue in 2021.23 Domestic credit growth, which fell quickly in the second and third quarter in 2020, has Broad money growth remained strong as steadied, likely showing increased demand foreign currency deposits improved for credit as the appetite for investment in Foreign currency deposit growth, which the construction and real estate sector picked significantly eased during the second quarter up (see discussion on credit by business of 2020, has accelerated since, resulting in undertakings below). Thanks to the central a gradual expansion of broad money (M2) bank’s accommodative monetary policy, domestic growth. Cambodia’s M2 growth accelerated to credit provided to the private sector picked 15.2 percent y/y as of February 2021, up from 9.7 up, expanding at 19.5 percent as of February percent y/y in April 2020. However, it remained 2021, compared to 17.7 percent at the end of below its pre-pandemic growth rate of 18.2 2020, as economic activity improved (figure 23). percent at the end of 2019. The initial recovery The credit-to-GDP ratio increased from 114.2 of broad money growth toward the beginning percent in 2019 to 142.2 percent in 2020. Deposit of 2021 was contributed mainly by rising growth, which fell to 7.3 percent y/y in April foreign currency deposits. Of the 15.2 percent 2020, picked up, increasing to 15.4 percent as broad money growth as of February 2020, the of February 2021. As interest rates on deposits contribution of foreign currency deposits (and remained broadly stable, the recovery in deposit Figure 22: Broad money growth Figure 23: Domestic credit and Figure 24: Contribution of recovered deposits picked up construction to credit Contribution to (y/y percent change) growth accelerated broad money growth (percentage point) (percentage point) Credit growth Deposit growth Other Foreing currency deposits (other deposits) 60 40�0 Wholesale & retail Transferable deposits Construction, real estate & mortgage 35 Currency in circulation Hotels and restaurants 50 YTD, y/y percent change 35�0 Manufacturing 40 30�0 25 30 25�0 20�0 15 20 15�0 10 10�0 5 0 5�0 -10 0�0 -5 Dec-15 Mar-17 Nov-18 Dec-20 Aug-17 Sep-19 Sep-14 May-16 Nov-13 Apr-19 Apr-14 Oct-16 Feb-20 Feb-15 Jan-18 Jan-13 Jun-18 Jul-20 Jun-13 Jul-15 Nov-18 Nov-19 Nov-20 Nov-17 Aug-19 Aug-20 Aug-17 Aug-18 May-19 May-17 May-18 Feb-19 Feb-20 May-20 Feb-17 Feb-18 Feb-21 Sep-20 Sep-17 Sep-18 Sep-19 May-18 May-19 May-20 May-17 Jan-18 Jan-19 Jan-20 Jan-17 Jan-21 Source: Cambodian authorities. Source: Cambodian authorities. Source: Cambodian authorities. 21 See Instruction Circular dated March 27, 2020, the National Bank of Cambodia. “Renegotiated loan” or “Restructured Loan” means any loan that has been rescheduled or refinanced in accordance with an agreement setting forth a new repayment schedule on a periodic basis occasioned by weaknesses in the borrower’s financial condition and/or inability to repay the loan as originally agreed. 22 National Bank of Cambodia 2021. 23 Joint statement by the Association of Banks in Cambodia and Cambodia Microfinance Association, April 7, 2021. CAMBODIA ECONOMIC UPDATE | JUNE 2021 29 Recent Economic Developments and Outlook growth likely reflected increased confidence and nonperforming loan ratios remained low at 2.7 a recovery of economic activity that positively percent and 1.8 percent for the banking sector impacted liquidity of the corporate sector (and and microfinance sectors, respectively.24 However, households), thus expanding their ability to given the continued loan restructuring process save. In addition, domestic credit financing the offered by banks and microfinance institutions, construction and real estate sector accelerated, the reported nonperforming loan ratios may not indicating a renewed appetite for investment correctly reflect the level of debt distress facing in the construction and real estate sector. After the banking and microfinance system. hitting a 2.5-year low, dropping to 6.9 percentage Interest rates of U.S.-denominated loans points in August 2020, the contribution of the and deposits remained broadly stable as construction and real estate sector to domestic credit growth once again accelerated, accounting of March 2021. The U.S.-denominated term for 9.6 percentage points in March 2021 deposit rates remained unaffected at 3.3 percent (figure 24). As of March 2021, there was a total of per year in March 2021, compared to 3.2 percent US$10.5 billion in outstanding credit provided the in December 2020. During the same period, the construction, real estate, and mortgage sectors. U.S.-denominated term loan rates stood at 8.9 percent a year and 9.1 percent a year, respectively. Agricultural lending rose––a healthy Due to Cambodia’s highly dollarized economy, development––thanks to an increased the central bank cannot influence interest rates, appetite for investment in the agriculture especially those of U.S.-denominated loans and sector driven by good agricultural commodity deposits.25 export prospects under the CCFTA (and by efforts to contain imports during the pandemic). Poverty is estimated to have increased As of December 2020, there was a total of regardless of the government’s response US$2.4 billion in outstanding credit provided Negative impacts of the pandemic on the agriculture sector, up from US$1.95 billion poverty linger, while the authorities continue at the end of 2019. In 2020, the contribution of to help households smooth consumption agricultural lending to credit growth rose to 1.9 and firms avoid bankruptcy. The authorities’ percentage points, up from 0.5 percentage points unprecedented cash transfer program has been in 2019. As of March 2021, agricultural lending supporting the livelihoods of the poor and the rose further to US$2.54 billion in outstanding vulnerable. The new cash transfer scheme for poor credit, or 23.1 percent y/y. The sector also and vulnerable households has seen increased received US$50 million in financing from the demand. As of January 2021, 710,929 households, state-owned Agriculture and Rural Development or 19.5 percent of all households, have received a Bank in 2020. Under the 2021 budget law, US$82 cash transfer from the government. In early June million is allocated to the state-owned bank. 2020 when the program began, there were only Lending to the hospitality industry 560,000 households eligible. As of October 2020, decelerated, mirroring the downfall of the more than 640,000 households had received a tourism sector which has been hit hard by the cash transfer.26 However, employment activity is pandemic. In 2020, the contribution of the hotel showing signs of recovery. According to the survey and restaurant industry to credit growth eased to of households, the percentage of respondents 0.5 percentage points, down from 0.9 percentage who were employed in December 2020, returned points in 2019, while the contribution of the to the level recorded in May and August 2020, manufacturing sector increased to 0.6 percentage but remained below its pre-pandemic level (see points, up from 0.2 percentage points during the box 3 for more detailed findings of the survey. same period. At the end of 2020, the reported While the share of households reporting declines 24 National Bank of Cambodia 2021. 25 However, the central bank introduced a lending rate cap at 18 percent per year in March 2017. See Prakas number B7-017-109 PK dated March 13, 2017. See https://www.nbc.org.kh/download_files/legislation/prakas_eng/Prakas-on-Interest-Rate-Cap-Eng.pdf 26 Presentation by the Ministry of Social Affairs, Veterans and Youth Rehabilitation on October 22, 2020. 30 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Box 3: Impacts of COVID-19 on households—results from the High-Frequency Phone Survey of Households1 Employment has yet to return to pre-pandemic levels, according to the High-Frequency Phone Survey of Households. Prior to the COVID-19 outbreak, 82 percent of respondents were working. Following the onset of the pandemic, 71 percent of respondents were working in May 2020, and this remained relatively unchanged until October, when there was a further decline in employment to 65 percent. Employment increased to 72 percent in December 2020. The negative impacts of the COVID-19 pandemic on non-farm family businesses remain substantial, with weak consumer demand driving the losses in business revenues (figure B3.1). In December 2020, more than half of households operating non-farm businesses (58 percent) reported having made “less” or “no revenues” relative to the previous month. Although there was a significant reduction in the share of non-farm business households reporting having “less revenues” or “no revenues” in May 2020 (81 percent), there has been no further reduction since October 2020 (54 percent). While the share of households reporting declines in household income has slowed since May 2020, about one in two households continued to report that their household income had declined relative to the last survey. Slowing declines in labor income and the provision of the government’s cash relief transfers to assist poor and vulnerable households during the COVID-19 crisis appear to have helped mitigate some of the losses. Since the launch of the nationwide COVID-19 relief transfer program in June 2020, there has been a marked increase in the share of Identification of Poor Households (IDPoor) receiving social assistance from the government, mostly in the form of cash transfers. By December 2020, 93 percent of eligible IDPoor households had received relief cash transfers, and most of them had received multiple payments. Beneficiaries of the COVID-19 cash transfers largely spent their cash on food. Food insecurity remained unchanged between October and December 2020. Among the Living Standards Measurement Study Plus (LSMS+) sample, the prevalence of moderate or severe food insecurity was 17 percent in December, which includes 0.5 percent of the population affected by severe food insecurity. This is compared to 17 percent of moderate or severe insecurity and 0.7 percent of severe food insecurity in October. Among IDPoor households, there was a statistically insignificant (at the 95 percent confidence interval) decline in the prevalence of moderate or severe food insecurity from 39 percent in October to 34 percent in December. Children’s engagement in learning activities declined due to the school term holiday and the second nationwide closure of schools on November 30, 2020, following a local COVID-19 outbreak (figure B3.2). The proportion of households with school-age children aged 6–17 engaged in learning activities declined from 92 percent in October—when it had reached pre-pandemic levels—to 57 percent in December 2020. Unlike the first nationwide school closure where instruction shifted to remote settings while the academic term progressed, the second school closure cancelled the remainder of the 2019–20 academic year for public schools and suspended in-person instruction for private schools for two weeks while e-learning was applied during this period. Figure B3.1. Changes in income by source Figure B3.2. Children engaged in education or learning since November 2019 activities in the last 7 days (percent) (percent) IDPoor 48 30 22 Family School closures Phase I: Partial Phase II: Partial Phase II: reopening School farm nationwide reopening of schools reopening of schools of schools nationwide closures LSMS+ 49 32 18 Mar� 2020 May 2020 Aug� 2020 Aug�-Sep� 2020 Sep� 2020 Oct-Nov� 2020 Nov� 2020 Dec� 2020 Dec� 2020-Jan� 2021 IDPoor 54 27 20 family Non- farm biz LSMS+ 70 20 10 HFPS Round 1 HFPS Round 2 HFPS Round 3 HFPS Round 4 IDPoor 54 35 11 empl� Wage LSMS+ 44 43 13 100 8 IDPoor 74 11 15 25 32 non- Remitt family ances 80 38 43 36 14 LSMS+ 56 35 9 25 35 41 60 67 family / IDPoor Assist- ance LSMS+ 28 47 24 92 86 26 16 58 40 NGO Pension property IDPoor 75 Income 68 from LSMS+ 38 40 22 62 57 64 20 IDPoor 74 18 33 LSMS+ 72 26 0 IDPoor 7 5 89 R1 R2 R3 R4 R1 R2 R3 R4 Assist- Govt/ ance LSMS+ 5 10 85 % LSMS+ IDPoor Reduced Stayed the same Increased Yes No Source: High-Frequency Phone Survey of Households Source: High-Frequency Phone Survey of Households in Cambodia. in Cambodia. Note: R = round. Note: 1. Karamba et. al (2021), The Socioeconomic Impacts of COVID-19 on Households in Cambodia: Results from the High-Frequency Phone Survey of Households Round 4 (17 December 2020-12 January 2021), Phnom Penh, Cambodia or the link of the full brief Monitoring the Impact of COVID-19 on Households in Cambodia. CAMBODIA ECONOMIC UPDATE | JUNE 2021 31 Recent Economic Developments and Outlook in household income has slowed since May Similarly, non-tax revenue shrank, reaching 2020, about one in two households continued to 0.69 trillion riels, a 19.8 percent year-on-year report that their household income had declined contraction. relative to the last survey. Children’s engagement Despite intervention, central government in learning activities declined due to the school expenditure remained contained, amounting term holiday and the second nationwide closure 3.19 trillion riels or a 1.5 percent year-on-year of schools on November 30, 2020 following a local COVID-19 outbreak. The proportion of increase during the first two months of 2021 (figure households with school-age children aged 6–17 26). Total expenditure was driven largely by capital engaged in learning activities declined from 92 expenditure which increased by 18.2 percent y/y percent in October—when it had reached pre- in the first two months of 2021, while wages and pandemic levels—to 57 percent in December 2020. compensation remained subdued, declining by 6.8 percent during the same period. In 2021, the share Revenue collection slowed further as impacts of externally funded capital spending shrank to of the pandemic were felt 19.0 percent of total expenditure or 49.2 percent Revenue collection, which was relatively of total capital spending, due largely to the strong in 2020 when ballooned profit taxes domestically financed capital spending boost. It for 2019 were filed, started to slow as negative is the first time that domestically financed capital impacts were felt. During the first two months exceeded externally financed capital. Public sector of 2021, central government revenue reached wages continued to be contained. The authorities’ 3.18 trillion riels, or a 10.6 percent year-on-year target of having a minimum civil servant’s contraction, due largely to a decline in taxes on monthly wage of at least 1 million riels has been goods and services as consumption faltered met or exceeded. In addition, responding to the (figure 25).27 Tax revenue, which includes taxes pandemic has required a substantial increase in on goods and services; taxes on profits, income, public outlays, reducing authorities’ fiscal space and capital gains; and taxes on international trade, for raising civil servants’ wages much further. collected during the first two months of 2021 Due to the continued government intervention amounted to 2.68 trillion riels or an 8.7 percent program, spending on social benefits and decline. This was due to the decline in taxes on subsidies combined, increased to 913.8 trillion riels goods and services, and taxes on international (figure 27), a rise of 17.4 percent y/y during the trade, while direct taxes remained resilient. first two months of 2021. Figure 25: Central government Figure 26: Central government Figure 27: Social benefits and domestic revenue expenditure slowed grants rose eased (billions of riels) (billions of riels) (billions of riels) Interest payments 800 Social Benefits (chapter 62) Non-tax revenues Taxes on int'l trade Capital expenditure 700 Grants (intergovernmental tranfers) (chapter 65) Taxes on goods & services Goods & services 4,000 Wages & compensation 40 4,000 Direct taxes 40 600 revenue (y/y % change, RHS) Expenditure (y/y %, RHS) 500 20 400 2,000 2,000 20 300 0 200 100 0 -20 0 0 0 Jan-Feb Jan-Feb Jan-Feb Jan-Feb Jan-Feb Jan-Feb Jan-Feb Jan-Feb Jan-Feb Jan-Feb Jan-Feb Jan-Feb 2018 2019 2020 2021 2018 2019 2020 2021 2018 2019 2020 2021 Source: Cambodian authorities. Source: Cambodian authorities. Source: Cambodian authorities. Note: RHS = right-hand scale. Note: RHS = right-hand scale. 27 Ministry of Economy and Finance, February 2021 Government Finance Statistics. 32 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Recent Economic Developments and Outlook The authorities extended the cash transfer poor and vulnerable individuals who are registered program through March 2021, after quickly in the government’s Identification of Poor introducing and scaling it up in June 2020.28 As of Households (IDPoor) database. There is a reserved January 2021, the cash transfer program benefited COVID-19 outbreak prevention and treatment 710,929 poor and vulnerable households (2.8 fund of US$30 million to upgrade prevention million people), of which 6,421 households were and detection facilities and to cover all costs for in Phnom Penh, 32,693 were from other urban COVID-19-related treatment for Cambodian areas, and 671,815 were from rural areas. The citizens. Necessary financing to the SME sector cash transfer program amounted to an estimated is provided through an SME financing facility of US$300 million in 2020. In 2021, the cash US$270 million, a reserved contingent fund. transfer program is budgeted at US$200 million. The overall deficit continued to be financed Cambodia has been able to quickly scale up and by current savings and external borrowing deepen the nascent cash transfer program, which was barely in place in the pre-pandemic period. A Continued spending pressures keep public decision by the authorities to provide emergency expenditure elevated, while revenue collection relief in the form of cash transfer to families with has slowed, resulting in the widening of the COVID-19-related deaths and infected as well as overall fiscal deficit. However, the deficit is poor residents in lockdown areas was issued May expected to be fully financed by the government’s 2021 and effective in June 2020.29 current savings (without resorting to domestic bank financing) and external borrowing. The Lessons have been learned from Cambodia’s overall fiscal deficit in 2020 is estimated to have rapid deployment, expansion, and deepening widened but remained at a moderate level of 2.7 of its social assistance program, particularly percent of GDP in 2020 (figure 28). Despite an the cash transfer system. (See the Special unprecedented increase in COVID-19-related Focus section on government-to-person (G2P) spending, estimated at 4 percent of GDP, efforts payments for social benefits.) The Special Focus were made to contain expenditure with a reduction section presents the key findings of a study on in spending on goods and services and other social benefit payments under the government- nonpriority spending. Total expenditure increase to-person (G2P) initiative, which assesses the is, therefore, estimated to have been moderate, payment system set up for the COVID-19 relief rising to 26.8 percent of GDP in 2020, up from transfer program and draw lessons learned from 25.5 percent of GDP in 2019. In addition, the the G2P payments for the current and future impact of the pandemic on domestic revenue was social assistance programs and beyond. lessened by ballooned profit taxes for 2019, which Government intervention is budgeted at were collected in April 2020. US$719 million In 2021, total revenues and grants are The 2021 budget for government intervention expected to ease further, declining to 22.7 is US$719 million (compared to US$823 million percent of GDP, down from an estimated 24.1 in 2020), of which the wage subsidy program percent of GDP in 2020 (and 27.0 percent of of US$59 million is allocated to provide partial GDP in 2019). Despite continued government wage subsidies of US$40 per month, together intervention, budgeted at 2.6 percent of GDP, with technical/soft skills training for furloughed total expenditure is also projected to moderate, workers in the tourism and garment industries. falling to 26.0 percent of GDP in 2021, compared Cash for work of US$160 million provides jobs to an estimated 26.8 percent of GDP in 2020, in rural areas through construction, upgrade, and thanks to the budgeted decline in spending on maintenance of rural roads, drainage systems, and goods and services. Under public expenditure small-scale irrigation. The cash transfer program rationalization measures, spending on goods and of US$200 million pays monthly cash grants to services has recently been cut and is projected to 28 Announcement on the outcome of the national social protection council dated March 3, 2021. 29 A decision by the Ministry of Economy and Finance and the National Social Protection Council dated May 13, 2021. CAMBODIA ECONOMIC UPDATE | JUNE 2021 33 Recent Economic Developments and Outlook halve, falling to 3.1 percent of GDP in 2021, down caused by the Cambodia-Thailand border dispute from estimated 6.5 percent of GDP in 2020.30 and other factors). The overall fiscal deficit is therefore projected to Cambodia has managed to greatly boost marginally widen to 3.3 percent of GDP in 2021, revenue collection in recent decades thanks compared to 2.7 percent of GDP in 2020. to its success in revenue mobilization under In 2021, the deficit is expected to remain fully its public financial management reform financed by external borrowing of 4.2 percent program. As a result, the authorities have of GDP, and by domestic financing-drawdown accumulated a relatively large fiscal space in the of government deposits of 0.3 percent of form of government savings, while continuing to GDP, while debt amortization accounts for maintain prudent fiscal management and a stable 1.2 percent of GDP (figure 29). To finance the macroeconomic performance. gap between revenue collection and financing Rising domestically financed capital during requirements, the authorities continue to tap into the pandemic boosted total capital spending their current savings–-drawdown of government deposits in the banking system. While remaining Since 2019, efforts have been made to solid, accounting for 24.1 percent of GDP (or significantly boost public capital investment 24.9 trillion riels) at the end of 2020, government in physical infrastructure, while public deposits significantly eased. Deposits grew at 4.6 investment management and debt percent (y/y) in 2020, down from 47.2 percent in management reforms have accelerated. Until 2019 (figure 30), due to a slowdown in revenue a few years ago, Cambodia heavily depended on collection and thus a deceleration of government external funds, which included both loans and savings accumulation. Cambodia experienced a grants financed by its development partners prolonged decline in government deposits during (official creditors) to fund its capital investment, 2009–11, when public expenditures shot up, especially its physical infrastructure. However, rising to 23.0 percent of GDP in 2011, up from Cambodia’s domestically financed capital has 16.1 percent of GDP in 2008 (see Annex) as the been boosted since 2019 (figure 31). In September authorities introduced a fiscal stimulus to mitigate 2020, the government approved an allocation of the negative impacts of the 2008–09 global US$150 million to develop physical infrastructure, financial crisis (as well as other spending boosts consisting of 38 roads in Siem Reap to be ready Figure 28: The general Figure 29: Foreign borrowing Figure 30: Government savings government overall financed the fiscal remained solid fiscal deficit widened deficit (billions of riels) (% of GDP) (% of GDP) Total revenue (and grants) Total expenditure Domestic financing Debt amortization Gov't savings (billions of riels) Overall balance Foreign financing (net) 30,000 200 30 y/y percent change, RHS 6�0 Total financing 25,000 25 0�3 150 4�0 5�0 20,000 20 100 2�0 4�2 15 2�5 2�7 15,000 0�0 50 10 -0�7 -0�8 -1�0 -1�2 10,000 -2�0 -2�2 -1�2 5 0 -3�5 5,000 0 -4�0 - -50 Jan-05 Jan-12 Jan-19 Jul-08 Apr-10 Jul-15 Apr-17 Oct-06 Oct-13 Oct-20 -5 2018 2019 2020e 2021p -6�0 2018 2019 2020e 2021p Source: Budget settlement laws and World Source: Budget settlement laws and World Source: Cambodian authorities. Bank staff estimates and projections. Bank staff estimates and proijections. Note: RHS = right-hand scale. Note: e=estimate, p=projection. Note: e=estimate, p=projection. 30 Instruction circular dated May 4, 2021, on expenditure rationalization and efficiency strengthening for 2021 budget, Ministry of Economy and Finance. 34 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Recent Economic Developments and Outlook by the end of 2021.31 A similar public investment share of private investment in total investment project, amounting to US$ 300 million to rose to 64.6 percent, up from 32.8 percent in build 34 roads with a combined length of 82.5 2011, reflecting continued investor confidence. kilometers was approved in 2019 to develop While countercyclical public investment is physical infrastructure in the seaside province important to economic recovery, private of Sihanoukville. The project is complete.32 In investment is also key for the revival of the 2021, domestically financed capital is expected to private sector. Rising gross fixed investment exceed (or be equal to) externally financed capital helps underpin economic recovery and sustain for the first time. As a result, Cambodia’s public economic growth. investment is the largest in the region (figure 32). Cambodia’s public debt rose, but risk of debt Efforts to reform public investment management distress remains low (PIM) have intensified. The 2019–25 Public Investment Management System Reform Strategy In 2020, the authorities signed US$2.02 billion (PIMSRS) was introduced in October 2019. in concessional loan agreements (74 percent Implementation of a detailed action plan for the of the debt ceiling) with their development PIMSRS began in March 2020. A technical working partners,33 compared to US$1,288.27 million group for preparation of detailed guidelines on signed in 2019. As impacts of the pandemic the project cycle and the project development continue, the gap between revenue collection facility for public investment management has and financing requirements is widening. To partly been operational since June 2020. Preparations finance the widening gap, Cambodia’s public have been made to develop government securities debt is increasing. The country’s public debt, (see the section on the domestic debt market for a which consists solely of external debt, is rising. more detailed discussion). Cambodia’s debt-to-GDP ratio reached 34.2 percent of GDP (US$8.8 billion in outstanding Cambodia’s gross fixed investment rose debt) in 2020 and is projected to increase to quickly after the economy recovered from 35.2 percent of GDP (US$9.6 billion) in 2021 the global financial crisis in 2009 (figure 33). (figure 34). Gross fixed investment reached 24.6 percent of GDP in 2020, up from 16.2 percent of GDP Risk of debt distress, however, remains low, in 2010 as economic growth accelerated. The due largely to the authorities’ borrowing Figure 31: Public investment is Figure 32: Cambodia’s net Figure 33: Gross fixed rising investment in investment rose (% of GDP) nonfinancial assets is (% of GDP) large1 (% of GDP, 2019) 12 10 30 Externally financed capital Domestically financed capital Private investment Public investment 10 8 25 6 8 20 4 6 15 2 4 10 0 2 -2 5 Nepal Malaysia Thailand Indonesia Singapore Cambodia Myanmar Philippines 0 0 Source: Cambodian authoriites. Source: World Development Indicators and Source: Cambodian authorities. Note: e=estimate, p=projection. Camobodian authoriites. Note: e=estimate. Note: 1 Cambodia 2020, the rest is 2016. 31 See a letter dated September 4, 2020 from Siem Reap provincial governor to the prime minister. 32 See news release dated July 17, 2020 by National Committee for Managing and Developing Cambodian beaches. 33 Cambodia Public Debt Statistical Bulletin, Volume 11, March 2021. CAMBODIA ECONOMIC UPDATE | JUNE 2021 35 Recent Economic Developments and Outlook principle of only contracting external debt Right (SDR)-denominated debt, at 24.6 percent. on concessional terms. The debt sustainability Although China is Cambodia’s top creditor, the analysis (DSA) conducted by the authorities in country’s public external debt denominated in 2020 concluded that Cambodia’s risk of debt Chinese yuan covered only 15.7 percent of total distress remains low. There is as yet no joint debt stock. World Bank/International Monetary Fund DSA Last year, loan disbursement from ADB was for 2020. The weighted average grant element the largest remained relatively high: 43.2 percent (2018), 51.6 percent (2019), and 46.5 percent (2020). In 2020, Loan disbursements from a few main external borrowing was mainly for the public creditors, which include the ADB, Japan, infrastructure sector, which accounted for 62.6 China, and the World Bank, boosted public percent, while the remaining 37.4 percent was for sector loan disbursements to Cambodia in other priority sectors. 2020. Total debt disbursement peaked in 2020, reaching more than US$1.2 billion, or a 40.3 China is Cambodia’s largest official creditor, percent y/y increase (table 1). Unlike during the with a total outstanding debt of US$3.9 past several years, when the largest contributions billion, or 44.2 percent of total debt stock. In to loan disbursement growth came mostly from recent years, Cambodia has grown increasingly bilateral creditors such as China and France, in dependent on China for both public sector loans 2020, the contribution of loan disbursement by and FDI inflows. Unlike Cambodia, Vietnam has the ADB was the largest, accounting for 30.4 diversified sources of finance. Vietnam’s largest percentage points of the 40.3 percent increase creditor is the World Bank, accounting for 31.9 in total loan disbursement. Disbursement percent of total central government public external from the ADB peaked at US$421.9 million in debt or US$15.2 billion (figure 35). Its second- 2020, up from US$159.11 million in 2019. The largest creditor is bilateral, Japan, accounting for contribution of debt disbursement from Japan 30.4 percent of total central government external was next, accounting for 7.6 percentage points debt or US$14.5 billion, followed by the Asian (US$149.8 million) of the increase, followed by Development Bank which accounted for 17.4 those from China and the World Bank, accounting percent. 4.0 percentage points and 3.5 percentage points, In 2020, U.S. dollar-denominated debt was respectively. the largest, accounting for 43.5 percent of Unlike its peers, Cambodia’s public debt is total debt stock, followed by Special Drawing entirely external Figure 34: Public debt is rising Figure 35: Cambodia is heavily Figure 36: Unlike its peers, (US$ billion) dependent on China Cambodia had no as official creditor domestic public debt (% share, 2019) (% of GDP, 2019) Outstanding 50 60 Public domestic debt Public external debt y/y percent change, RHS 45 Vietnam Cambodia 12 18 40 50 16 10 35 14 30 40 8 12 25 10 20 30 6 15 8 10 20 4 6 5 4 0 10 2 WB Japan China Korea France ADB Private creditor Other bilateral Other multilateral Germany 2 0 0 0 2018 2019 2020 2021p Source: Cambodia Public Debt Statistical Source: Cambodia Public Debt Statistical Source: MFMod, World Bank Group. Bulletins. Bulletins and Haver Analystics. Note: p=projection, RHS = right-hand scale. 36 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Recent Economic Developments and Outlook Cambodia’s public debt comprises only financing requirements. Cambodia has become external debt, as the remaining outstanding a lower-middle-income economy. Concessional domestic public debt of US$1.57 million was borrowing is, therefore, shrinking. The domestic fully repaid in February 2020.34 As discussed, the debt market, when established, will help gradually entire public debt stock is denominated in foreign diversify financing sources with a shift toward currencies. Cambodia is, therefore, exposed to public domestic debt, while promoting domestic risks from exchange rate adjustments, while savings. It also helps dedollarize the economy the economy is highly dollarized. Cambodia’s if domestic debt issued is denominated in local ASEAN neighbors such as Vietnam and Thailand currency. have already shifted to borrowing domestically. Outlook Domestic public debt accounted for 82.9 percent and 36.8 percent of total outstanding public debt Cambodia’s growth outlook remains highly in Thailand and Vietnam, respectively (figure 36). uncertain as the actual shape and pace of recovery is largely dependent on the course of the virus and Cambodia is in the process of establishing the pace at which the vaccine can be rolled out. its domestic debt market. A new Law on Therefore, we explore two scenarios: a baseline Government Securities was adopted in December scenario, which is based on more optimistic 2020, paving the way for issuance of the first assumptions on infection and vaccination; and a government securities in the near future, downside scenario, which assumes the realization establishing a domestic debt market. The 2020 of most of the downside risks. Law on Government Securities provides an overall legal and regulatory framework for issuing, Under the baseline scenario, the economy is trading, and managing government securities projected to grow by 4 percent in 2021 (table with transparency, accountability, efficiency, and 2), supported by a gradual recovery in domestic effectiveness, supporting public debt management demand following the vaccine deployment and and debt sustainability. It aims at strengthening improvement in external demand and capital cash management of the government, responding inflows (see also table 3 which is an assumption to financing requirements for socioeconomic matrix, under the baseline and downside developments. The law mandates that issuance of scenarios, below). The projections assume that government securities be stipulated in the budget market confidence is restored, while the current law and under the sole authority of the Minister community outbreaks, which began in February of Economy and Finance to meet specified 2021, remain under control, resulting in a staged Table 1: Debt disbursements (US$ million) and contribution to debt disbursement growth (percentage points) 2014 2015 2016 2017 2018 2019 2020 % % % % % % % Total 648.4 6.3 595.3 -8.2 543.0 -8.8 722.2 33.0 598.3 -17.2 864.7 44.5 1,213.3 40.3 China 432.2 5.4 367.3 -10.0 328.2 -6.6 392.9 11.9 231.9 -22.3 322.1 15.1 356.5 4.0 ADB 71.6 -9.2 97.5 4.0 143.3 7.7 137.0 -1.2 100.7 -5.0 159.1 9.8 421.9 30.4 WB 34.2 3.6 2.1 -4.9 7.0 0.8 15.7 1.6 23.6 1.1 61.7 6.4 92.0 3.5 S. Korea 36.9 0.9 32.1 -0.7 19.7 -2.1 38.5 3.5 33.9 -0.6 44.7 1.8 67.0 2.6 Japan 21.9 -0.3 27.5 0.9 23.6 -0.7 48.9 4.7 72.8 3.3 83.8 1.8 149.8 7.6 France 27.3 4.5 38.3 1.7 0.0 -6.4 72.5 13.4 47.0 -3.5 147.3 16.8 47.1 -11.6 ROW 24.1 1.3 30.2 0.9 21.0 -1.5 16.4 -0.8 88.1 9.9 45.8 -7.1 78.8 3.8 Source: Cambodia Public Debt Statistical Bulletins, Ministry of Economy and Finance. Note: ADB = Asian Development Bank; ROW = rest of the world; WB = World Bank. 34 Cambodia Public Debt Statistical Bulletin (March 2021), Ministry of Economy and Finance. CAMBODIA ECONOMIC UPDATE | JUNE 2021 37 Recent Economic Developments and Outlook easing of the lockdown restrictions without a countercyclical fiscal policy with a continued significant mid- to long-term adverse impacts social protection program, while boosting public on the corporate or banking sector. FDI inflows investment. Public debt and budget pressures are steadily returning. Under the baseline, it is have risen sharply and are likely to persist, and expected that the authorities are taking steps to the authorities will need to consider options for attract further investment and promote trade by restoring fiscal discipline once the recovery takes introducing a new investment law in the second hold. half of 2021, boosted by the recently signed free trade agreements. Under Cambodia’s economic Under the downside scenario, the economy recovery plan, efforts are underway to boost is projected to grow at 1.0 percent in 2021. competitiveness through investment climate and The downside scenario assumes a deterioration business environment reforms and leveraging of in domestic economic conditions caused by digital technologies. The authorities are pursuing repeated lockdowns and travel restrictions as Table 2: Macro outlook (baseline) 2020e 2021p 2022p 2023p National Accounts and Prices GDP at constant market prices (% change) -3.1 4.0 5.2 6.0 Agriculture 0.4 1.1 1.0 1.3 Industry -1.4 6.7 7.4 8.5 Services -6.2 2.6 4.8 5.4 Inflation, consumer prices (annual %, period 2.9 3.0 3.0 3.0 average) General Government (% of GDP) Revenue and grants 24.1 22.7 23.1 23.8 Expenditure and net lending 26.8 26.0 27.1 27.0 Overall balance (including grants) -2.7 -3.3 -4.0 -3.2 Foreign financing 4.8 4.2 4.1 4.1 Net domestic financing (from current savings) -1.0 0.3 1.1 0.3 Amortization -1.0 -1.2 -1.2 -1.2 Money and credit Broad money (% change) 15.3 20.0 21.4 21.0 Credit to the private sector (% change) 17.7 23.2 25.8 28.1 External Sector (US$ million unless otherwise specified) Exports (goods and services) 15,853 18,844 20,361 22,857 Imports (goods and services) 16,221 19,981 21,616 23,963 Foreign direct investment, net inflows 3,485 3,750 4,160 4,249 Gross official reserves 21,228 23,140 25,026 27,272 (months of imports) 10.4 9.5 9.3 9.0 Current account (percent of GDP) -9.9 -9.8 -10.2 -9.7 Exchange rate (Khmer riel per US$ average) 4,077 4,070 4,050 4,050 Total public debt (% of GDP) 34.6 35.2 36.9 36.4 Memorandum items: Nominal GDP, US$ million 25,484 27,215 29,749 32,524 Source: Cambodian authorities and World Bank staff estimates and projections. Note: e = estimates; p = projections 38 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Recent Economic Developments and Outlook efforts to contain the outbreaks are not successful, is disrupted by repeated lockdowns and impacted preventing economic recovery from taking hold, by the partial withdrawal of the “Everything But regardless of improvements in external conditions. Arms” arrangement and temporary expiration Containment efforts drain public resources of the Generalized System of Preferences. The while deployment of the vaccination program is fiscal deficit widens, as spending pressures rise, assumed to have progressed slowly. Consequently, while domestic revenue declines sharply, caused market confidence is subdued, leading to a marked by prolonged and sluggish domestic economic slowdown in FDI inflows, while the main export- activity. As public debt and budget pressures oriented manufacturing sector such as GFT goods persist, external borrowing and drawdown of the Table 3: Assumption matrix under the baseline and downside scenarios Assumptions Baseline Downside Length, duration, Lockdowns are few, brief, localized Lockdowns are frequent, prolonged, and intensity of and only confined to Q2 of 2021 for nationwide and may extend to Q3 of 2021. the lockdowns pockets of urban areas. Pace of Already going well, with 13.6% Vaccination drive is met with public health vaccination vaccinated – second highest in ASEAN human resource constraints. Consequently, after Singapore (as of end-April 2021). the country will not reach herd immunity until late 2022. Government’s Strong counter-cyclical policies Same as baseline response Speed of Speedy recovery in the United States, Same as baseline global recovery Europe, and China–-Cambodia’s three and return of major trading partners. international tourism Economic Vaccines are successfully administered Market confidence is subdued, leading to a conditions as targeted, leading to a restoration marked slowdown in FDI inflows, while the of market confidence, while FDI main manufacturing sectors such as garment, inflows continue, attracted by the footwear and travel goods for exports are new investment law and CCFTA (and disrupted by lockdowns and impacted by RCEP) and a relocation of factories as the partial withdrawal of the “Everything political tensions in Myanmar persist. But Arms” arrangement and temporary There are moderate adverse effects expiration of the Generalized System of affecting corporates as goods exports Preferences, regardless of improvements in (including agricultural exports) recover, external demand conditions. Consequently, thanks to improvements in external significant adverse effects resulting in demand conditions. Efforts under the liquidity problems become solvency problems economic recovery plan are currently affecting corporates. The fiscal deficit is underway to boost competitiveness expected to double as spending pressures through investment climate reforms rise and domestic revenue declines caused and leveraging of digital technologies. by prolonged sluggish economic activity. Although public debt and budget Rising public debt and budget pressures pressures have risen, the authorities will persist, requiring more external borrowing be able to restore fiscal discipline once and drawdown of the government’s current the recovery takes hold in the short savings. term. Macro projections 2021 2022 2021 2022 Real growth 4.0 5.2 1.0 4.5 (percent) Fiscal deficit -2.7 -3.3 -5.0 -6.5 (percent of GDP) Debt stock 35.2 36.9 36.5 38.0 (percent of GDP) CAMBODIA ECONOMIC UPDATE | JUNE 2021 39 Recent Economic Developments and Outlook government’s current savings increase, requiring established, labor-intensive, and export-oriented more time before fiscal discipline can be restored. garment industry, the manufacturing sector has for decades remained largely engaged in the In the post-pandemic world, Cambodia’s “cut-make-trim” process, the lowest value-added economy will likely follow a new trajectory section of the entire value chain. The country’s (a new normal), expanding rather moderately external competitiveness eroded, partly caused by in the short term. Cambodia’s economy is rapidly rising wages—made worse by a dollarized tourist-dependent. Regardless of a recovery in economy—and exacerbated by challenges in doing domestic tourism after the easing of lockdowns, business and investment climate reforms. The global tourism is expected to remain below pre- vulnerabilities, however, were masked by a surge in pandemic levels until 2023. Global economic capital inflows in the pre-coronavirus crisis period recovery, supported in part by the significant U.S. to largely finance the construction and real estate stimulus, will revive trade in goods and could sector. With the collapse of the tourism sector and provide an external boost to growth of as much as the stalled construction boom, the pandemic has 1 percentage point on average, but global tourism exposed Cambodia’s structural weaknesses. is expected to remain below pre-pandemic levels until 2023, which will delay economic Along with domestic weaknesses, an recovery in tourism-dependent economies. A uncertain global outlook remains a key risk structural change, driven by a diversification of to Cambodia’s recovery. Delays in global FDI projects which were earlier concentrated vaccine distribution could lead to the persistence largely in the construction and real estate sector of the pandemic, while outbreaks trigger more to non-garment manufacturing and agricultural lockdowns. Cambodia’s merchandise exports will commodity exports appears to be emerging, likely be further impacted by partial withdrawal adapting to changes in domestic economic and of the “Everything But Arms” arrangement and external demand conditions. temporary expiration of the Generalized System of Preferences. In addition, Cambodia is increasingly Challenges and risks dependent on China in trade, investment, and Risks to Cambodia’s growth outlook have official development assistance. High credit intensified as the current wave of coronavirus growth in the banking sector, particularly to the outbreaks lingers. Domestic economic activity construction and real estate sector, remains a key has recently been disrupted by the reintroduction risk to Cambodia’s financial stability. of a lockdown during the second half of April Following a local outbreak that started on 2021. The lockdown, which was imposed on February 20, 2021, Cambodia has experienced the two largest urban centers–-Phnom Penh rapidly rising reported coronavirus cases and and Takhmao, the second-most populated city deaths. As of May 31, 2021, there were 30,094 in Kandal province–-was necessary and saved cases and 214 deaths. The pandemic threatens lives, though it may also have been economically to reverse years of extraordinary development damaging. The current high infection rate is also gains in the country. In the absence of significant threatening the public health system. Factories and mitigation measures, the COVID-19 pandemic businesses were affected, while domestic demand, could result in sharply rising unemployment and especially for services products such as domestic increased poverty. Poverty simulations based on travel, tourism, and hospitality services, were once macroeconomic projections show that a sharp again hit by travel restrictions, travel avoidance, economic slowdown would produce a substantial and declining incomes. This will likely be a drag increase in poverty of between 5.4 and 6.0 on growth until wider vaccine deployment. percentage points. This translates into between Cambodia’s growth model—characterized 859,000 to 950,000 additional poor and a reversal by a narrow export base with a high degree of six years of progress against poverty. Of these, of concentration of products and markets— households relying on non-agricultural wages, exhibited weaknesses years before the particularly construction workers, will be hit pandemic hit. While the country has a well- hardest by the outbreak. 40 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Recent Economic Developments and Outlook Policy options will continue to be the sole macroeconomic instrument to support relief, recovery, and It is urgent to accelerate implementation of growth. Relief continues to be needed, especially the vaccination program, while continuing for poor and vulnerable households. Recovery to effectively contain the rise in infection requires improvements in the investment climate cases and deaths. Given potentially lingering and incentives to spur investment and to boost outbreaks across the country, the benefits of exports because the COVID-19 shock threatens rapid vaccination in reducing growing numbers to lock the economy into an underemployment of hospitalization and deaths, while relieving pressures on the struggling health system equilibrium. Growth requires further public will outweigh its costs. Non-pharmaceutical investment to improve the quality of both hard interventions can also play a complementary (physical) and soft (regulatory) infrastructure to role in the containment of the disease. Of a reduce transport and logistics costs in order to population of more than 15 million, over 10.1 boost external competitiveness. million Cambodians are aged 18 and older and It is imperative to continue to closely monitor may need to be vaccinated. Thus, Cambodia needs vulnerabilities arising from a prolonged over 20 million doses of coronavirus vaccine for property boom and the increase of credit this age group alone. According to the national provided to the construction sector during the COVID-19 vaccination strategic plan, the country pre-pandemic period. The loan-to-deposit ratio expects to obtain 13.5 million doses, or about 66 had already reached 120 percent in 2020, up from percent of the needed vaccines for the age group 78.7 percent a decade ago. This is particularly by September 2021. The plan targets to fully crucial as current community outbreaks linger and vaccinating about 5 million people under the first the number of factories and firms being severely priority group during May to November 2021, a affected are rising. Such events are likely to further period of seven months, with about 10 million diminish the ability of businesses and households doses of coronavirus vaccines. As of end-April to repay loans, putting the entire financial sector 2021, about 2.4 million doses of the vaccines under increased stress. The authorities recently have deployed. So, the plan should achieve an called on housing developers to accept delays average of 1.1 million doses per month during in mortgage payments. The total value of loans May to November 2021 to completely deploy the and affected borrowers’ accounts that need to be remaining 7.6 million doses. A masterplan for restructured will likely increase further this year, COVID-19 vaccination published in March 2021 from last year’s reported 285,000 accounts with by the Ministry of Health targets vaccinating 10 a total of US$4.2 billion or 11.2 percent of total million people by mid-2022. outstanding credit of the banking and microfinance Given the country’s relatively large fiscal sectors. Of this US$4.2 billion, US$1.73 billion, space, further boosting pro-poor and growth- or 41.5 percent, was provided to affected enhancing public investment, including cash- borrowers engaged in the construction, tourism, for-work projects, is critical for economic and transport (and logistics) sectors combined. As recovery. In this regard, the 2021 budget has these sectors continue to be hit hard by lingering boosted domestically financed public investment local outbreaks, demand for loan restructuring which, for the first time, exceeds externally financed from the sectors will certainly increase further. public investment. More efforts are needed, Non-performing loans are expected to rise from however, to improve the business and investment their current low levels of 2.7 percent and 1.8 climate, especially to facilitate the structural percent for the banking sector and microfinance change, as the construction boom has stalled and sector, respectively, in 2020. The central bank more investment is now going into production to needs to continue to closely monitor financial serve mostly exports, while shoring up confidence risks, focusing on liquidity conditions, capital, with introduction of the new investment law, and quality of credit together with the current taking advantage of the CCFTA and RCEP. As macroprudential measures in place as discussed the economy is highly dollarized, fiscal policy in the monetary section above. CAMBODIA ECONOMIC UPDATE | JUNE 2021 41 Special Focus: Government-to-Person (G2P) Payments for Social Benefits Special focus: Government-to-Person (G2P) payments for social benefits SPECIAL FOCUS: GOVERNMENT-TO- PERSON (G2P) PAYMENTS FOR SOCIAL BENEFITS35 INTRODUCTION As discussed in the macroeconomic section above, Cambodia has been able to quickly scale up and deepen its cash transfer program, which was barely in place pre-COVID-19. Thanks to the current social assistance program, Cambodia has so far been able to prevent millions of people from falling back into extreme poverty, which could potentially reverse decades of hard-won gains in reducing poverty. To gather lessons learned from Cambodia’s relatively swift introduction, rapid expansion, and deepening of its social assistance program, particularly the cash transfer program, the World Bank is undertaking a study on government-to-person (G2P) payments for Cambodia’s social benefit system. Key findings of the study discussed below provide insights on the (G2P) payments for the current and future social assistance programs and beyond. RGC RESPONSE TO THE COVID-19 PANDEMIC Cambodia’s national social assistance programs were at a nascent stage when the COVID-19 pandemic hit. Until 2018, Cambodia spent around 0.05 percent of its GDP on social assistance—one of the lowest in the world. Cambodia launched its first national social assistance program, the Official Cash Transfer Program for Pregnant Women & Children, using identified poor (IDPoor) families. The program, announced in June 2019, was formally established through a sub-decree and became effective in January 2020. By February 2020, when the pandemic hit, the program had reached approximately 80,000 beneficiaries, or about 0.5 percent of the population. In response to the challenges created by COVID-19, the Royal Government of Cambodia (RGC) established a comprehensive response and fiscal stimulus package. The response was aimed at addressing the health, social, and economic impacts of the crisis. The government introduced, among other things, social protection of poor and vulnerable groups and economic measures that include wage subsidies and tax relief for businesses in hard-hit sectors, a Cash for Work program to create job opportunities in rural areas, a support facility to small and medium-sized enterprises (SMEs), and low- interest loans to struggling businesses through the newly established SME Bank and the Agricultural and Rural Development Bank. Social assistance has been massively scaled up to the poor and vulnerable households, leveraging the existing IDPoor database to deliver relief cash transfers to registered IDPoor households. Based on the CTP-PWYC as a model for delivering immediate relief assistance (see box S.1), the cash transfer program has been the largest component of the government’s support package. Launched in June 2020, the program has disbursed US$230.5 million in cash transfers as of February 2021.36 The program is currently expected to continue at least until June 2021 and to disburse around US$30 million in cash transfers per month. The program has reached over 688,000 households (2.7 million individuals) or about 17 percent of the population, which is a dramatic increase compared to the pre-COVID-19 level of social assistance in terms of both reach and coverage. 35 This Special Focus was prepared by Marco Nicolì. The author wishes to thank Maheshwor Shrestha, Robert J. Palacios, and Biagio Bssone for their inputs and suggestions. 36 Though initially introduced as a two-month program in June 2020, the program has been extended multiple times. Currently, the relief transfers are expected to continue until June 2021, which could potentially be extended depending on the circumstances. 44 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Box S.1. CAMBODIA’S SOCIAL PROTECTION RESPONSE TO COVID-19 Bracing for the economic impact of COVID-19, the Royal Government of Cambodia moved quickly to fund and scale up a cash transfer program for poor households. Before COVID-19, as of early 2020, 506,000 households (approximately 15 percent of the population) were identified as poor through the country’s poverty identification system known as the IDPoor program, thereby qualifying for a number of social services. Developed within the Ministry of Planning (MOP) since 2005, the IDPoor system uses a participatory community approach combined with a poverty scorecard to identify households living in poverty. Until 2019, a third of provinces conducted the extensive community-led process each year, ensuring all urban and rural areas were covered during a three-year period. Since 2011, all services for poor people have been legally required to use IDPoor to target beneficiaries. Currently, households with an IDPoor “equity” card can access several national programs, such as free access to health care under the Health Equity Fund, financial assistance via the Cash Transfer Program for Poor Pregnant Women and Children (zero to 2 years old) (CTP-PWYC), and the Scholarship Program for Children in Primary and Secondary Schools. The social protection response to the COVID-19 crisis built on the existing infrastructure of the CTP-PWYC. Any IDPoor equity cardholder can register with an administrator at the commune level and receive an account from an e-payment provider (see box S.3). The cash transfer program is implemented primarily by the Ministry of Planning (MOP) and the Ministry of Social Affairs, Veterans and Youth Rehabilitation (MoSVY) with support from the Ministry of Interior. The MOP is responsible for beneficiary identification through IDPoor, including making data on eligible households available to the MOSVY, which manages registration, benefit calculations, and payment processes. Due to a high level of commitment from local stakeholders, the IDPoor program has switched to an on-demand system (OD-IDPoor) to identify the poor, led by the communes. This process led to the registration of over 560,000 households by June 2020, and the number continues to increase. As of March 2021, over 710,000 households (2.8 million individuals) were eligible to receive the cash transfer benefit. Source: Policy in Focus, The International Policy Centre for Inclusive Growth, Volume 19, Issue No. 1, March 2021. The relief cash transfer program provides benefit amounts based on locality, poverty status, household demographics, and vulnerability. The benefit levels depend on locality (rural or urban), level of poverty (IDPoor 1, the extreme poor; or IDPoor 2, poor), and household size. An additional amount is provided for vulnerable groups that include people with disabilities, the elderly above age 60, children under age five, and people living with HIV/AIDS. The information relevant to the determination of the benefit amount is collected as part of the IDPoor program and is present in the database. On average, each household received about US$45 per month. The rapid rollout has been challenging, yet successful. The government (through relevant ministries) has been working closely with development partners to ensure affordability and to develop a comprehensive implementation plan including identification, registration, linking to mobile payment systems, and building the capacity of at least 30,000 program implementers and commune officials to ensure prompt delivery of this social assistance program.37 This was the first time a social protection program has covered such a large proportion of the population (as defined by IDPoor), and was achieved in a remarkably short time through an effective, ad-hoc payment mechanism (see next section). Indeed, survey data show that relief transfers reached over 95 percent of eligible households (that is, IDPoor households).38 37 Development Policy Letter from Dr. Aun Pornmoniroth, Deputy Prime Minister and Minister of Economy and Finance of the Kingdom of Cambodia, to the President of the Asian Development Bank, June 16, 2020. 38 Independently conducted phone-based surveys by the World Bank also find similar levels of reach among the eligible population (World Bank 2021, forthcoming). CAMBODIA ECONOMIC UPDATE | JUNE 2021 45 Special focus: Government-to-Person (G2P) payments for social benefits Consequently, the relief transfer program has had a large positive impact among the recipients. Forthcoming analysis by the World Bank finds that the relief transfers were highly valued by the recipients. Seventy-eight percent considered the transfers to be either extremely important or very important to their well-being. A similar share reported that the transfers mattered a lot for their well-being. Furthermore, households that received larger transfers are more likely to have better living conditions (figure S.1) and are more likely to report an increase in household well-being compared to the pre-pandemic (January 2020) or pre-relief (June 2020) period. They are also less likely to report food scarcity and to have a more optimistic outlook about their well-being in the coming months. SOCIAL ASSISTANCE DELIVERY PROGRAM: PAYMENT MECHANISM The payment mechanism of the program relies on the services of Wing, a leading mobile payments provider in Cambodia, and its network of more than 9,000 payment agents across the country. Eligible beneficiaries (heads of household) register for the program with their IDPoor cards in the presence of commune council members (who verify household identity) and activate an account. The account is not a full-fledged mobile money account; it does not require a phone number and is dedicated exclusively to the transfer program. Beneficiaries then visit a Wing agent and set up a personal identification number (PIN), which allows them—along with their IDPoor card—to collect cash at a Wing agent every month. Wing is given automated access to relevant fields of the IDPoor database via an Application Programming Interface (API), so that each account can be associated with every owner’s IDPoor number and receives government money to fund cash collection by beneficiaries (figure S.2). Figure S1: Household well-being increases with higher amounts of received relief transfers �6 Househod wellbeing and economic �6 Househod wellbeing and economic status improved relative to Jan 2020 status improved relative to Jan 2020 �4 �4 �2 �2 0 0 100 200 300 400 500 600 100 200 300 400 500 600 �5 Optimistic about household 1 Index of food insecurity experienced in past 30 days wellbeing in the next few months �8 �4 �6 �3 �4 �2 �2 �1 100 200 300 400 500 600 100 200 300 400 500 600 Cumulative amount of relief transfers received (US$) Source: World Bank (2021, forthcoming). 46 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Special focus: Government-to-Person (G2P) payments for social benefits The program has been largely successful in effectively delivering funds to the beneficiaries. The payment mechanism was designed with the sole purpose of delivering cash rapidly to beneficiaries, as cash was the quickest option available in the country. Technology has helped the pre-delivery phase, in a context that was constrained by mobility restrictions and social distancing. The distribution of funds was remarkably smooth given the circumstances., Some challenges were encountered during implementation, especially in the initial stages, but these seem to have affected a minority of transfers. The most frequently reported challenges included implementation aspects (unstable internet connection, issues with timely handling of complaints, limited monitoring capacity); issues at the level of the Commune office (limited capacity of some commune officials or untimely replacement of trained officials, not enough awareness raising, and occasional unlawful practices); and, issues at the level of the household (lack of awareness of the program, lost stolen or damaged cards, forgotten PIN, unpermitted sharing of benefit card, difficulty in withdrawing funds by non-head of households). A sizable share of beneficiaries needed to travel a considerable distance to receive the transfer, particularly in the mountains. The need to physically distribute cash implies that beneficiaries need to reach the Commune first when registering and the closest Wing agent after that for each withdrawal. Figure S2: Benefit registration and disbursement process Beneficiary visits Commune official Commune, registers Beneficiary visits Wing confirms eligibility and for COVID-19 relief agent, presents IDPoor, includes beneficiary in transfer program using sets up a PIN MoSVY database IDPoor Wing agent confirms In subsequent eligibility and benefit Wing agent disburses withdrawals, beneficiary can go directly to amount by consulting cash to the beneficiary a Wing agent with MoSVY database IDPoor and PIN Figure S3: Average travel time Figure S4: Percentage of households traveling 45+ minutes Average travel time 25 20 23 Percent Total 20 22 15 12 18 9 30 30 10 6 Plateau and Mountain 27 4 3 4 5 4 4 4 3 23 5 25 10 13 9 6 0 6 2 12 11 17 8 14 10 10 6 Coastal 24 24 0 Phnom Penh and��� 25 1(Poorest) All Male Female Tonle Sap Coastal 5(Average or higher) Plateau and Mountain 2 3 4 Plain Tonal Sap 23 25 21 18 20 Plain 20 17 17 14 16 Phnom Penh and urban areas 15 13 0 5 10 15 20 25 30 35 Round 2 Round 3 Round 4 Round 5 All Gender Region Social economic status Roud 2 Roud 3 Roud 4 Roud 5 Source: Cambodia COVID-19 High-Frequency Phone Survey, World Bank, European Union, and Australian Aid, 2020–2021. CAMBODIA ECONOMIC UPDATE | JUNE 2021 47 Special focus: Government-to-Person (G2P) payments for social benefits This can be a significant cost for a household when accounting for the cost of travel, the time spent, and the possible loss of opportunity / income. On average, beneficiaries had to travel 18 minutes to receive the transfer; however, in some areas they had to travel up to 25 minutes (see figure S.3). Four percent of beneficiaries had to travel more than 45 minutes, but this figure went up to 12 percent in some areas (see figure S.4). Preliminary analysis being undertaken by the World Bank indicates that over 15 percent of beneficiary households may live more than 10 kilometers from the nearest agent, and over 3 percent may live more than 30 kilometers from the nearest agent. Figure S5: Percentage of adults with a formal Figure S6: Percentage of the population with account an account at a financial institution or mobile money provider 80 80 60 60 40 40 20 20 0 Cambodia East Asia & Pacific Lower Middle Income 0 Cambodia East Asia & Pacific Lower Middle Income Fl Accounts 2017 Fl Accounts 2014 Mobile Accounts 2017 Mobile Accounts 2014 All a ccounts, 2017 All a ccounts, 2014 All a ccounts, 2011 Figure S7: Percentage of adults who have made a digital payment Used a debit or credit car to make a purchase Used a mobile phone or the internet to access an account Used the internet to pay bills or to buy something online Used an account to receive government payments Used an account to receive private sector wages Used an account to pay utility bills Made or received digital payments 0 10 20 30 40 50 60 Lower Middle Income East Asia & Pacific Cambodia Source: World Bank’s 2017 Global Findex Database. Figure S8: Do you have a payment account? (%) Figure S9: Do you use anything other than cash to make payments? 100 80 71 70 80 60 60 75 78 86 81 40 40 19 19 20 20 9 8 2 19 11 3 4 1 3 0 9 15 9 0 0 5 Yes, Yes, mobile Yes, other No,but No,and not R3 R4 R3 R4 payment phone interested interested LSMS+ IDPoor card LSMS+ IDPoor No Yes, other account Yes, both Data from round 4. Yes, e-money / mobile money account Source: Cambodia COVID-19 High Frequency Phone Survey, World Bank, European Union, and Australian Aid, 2020–2021. 48 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Special focus: Government-to-Person (G2P) payments for social benefits While the payment mechanism adopted has indeed proven effective as an immediate remedy to an emergency, some limitations should be noted that prevent it from being a springboard for future developments. These limitations can be summarized under the following three interlinked aspects: (i) use of cash instead of digital payments, (ii) reliance on a single service provider, and (iii) missed opportunity to advance financial inclusion. The level of financial inclusion in Cambodia is still very low. As shown in figure S.5, account ownership in Cambodia is one of the lowest in the East Asia and Pacific region; only 21.7 percent of Cambodians currently have access to an account compared to a regional average of 70.6 percent. When compared to other lower middle-income countries, Cambodia falls far behind the group average of 57.8 percent. While account use is low, there has been good growth over the last six years, with account ownership increasing from 3.7 percent in 2011 to the current level of 21.7 percent.39 Figures S.6 and S.7 confirm this finding and show a very low level of adoption of digital payments in Cambodia. The most recent survey covering IDPoor households confirms that most of them are still unbanked and prefer to make payments in cash rather than using other payment devices (see figures S.8 and S.9). With limited or no access to e-money facilities especially by the poor, physical cash had to be relied upon to make government funds available to people who had no alternative means to receive it. Demand-side elements contribute to the low levels of financial inclusion and interest in digital payments in Cambodia. Financial literacy levels are low, especially among the low-income population. In a recent survey,40 the share of respondents who answered five out of seven financial knowledge questions correctly, which is considered the minimum target level, was 17 percent (compared to 26.6 percent in Vietnam, another low-scoring country). The basic financial needs are satisfied by cash and cash-based services such as over-the-counter person-to-person payments. Even in urban areas where Box S.2. Retail Payment Systems in Cambodia The retail payment infrastructure of Cambodia is developing rapidly, but the overall landscape has not yet taken a clear configuration, as various initiatives are in place and some of them overlap to some extent. The introduction of the National Clearing System operated by the National Bank of Cambodia (NBC) has been one of the main drivers for the growing use of interbank credit transfers in Cambodia. In 2016, the NBC—in cooperation with commercial banks and deposit-taking microfinance institutions—established Fast and Secure Transfer (FAST), a payment system for low-value credit transfers, which offers 24/7 processing of funds (denominated in Cambodian riel) and ensures availability to the receiver in close to real time. The system is open to the participation of banks, Payment Service Institutions (PSI), and Micro Deposit- taking Institutions (MDI). The system is still characterized by very low volumes and values of transactions, and not all banks are actively using its services, largely due to investment cost issues. The NBC is soft launching the Retail Payment System (RPS), in cooperation with a select group of banks and one MDI. The RPS consists of three retail payment mechanisms (Real-Time Fund Transfer, Mobile Payment System, and QR-Code Payment System) and an Electronic Clearing System for the electronic transfer of funds. The main purpose of the RPS is to promote innovation in the retail payments space, improve interbank transactions, accelerate operational efficiency, enhance fund transfer security, and promote financial inclusion. The NBC is promoting interoperability of domestic debit card payments by establishing the Cambodian Shared Switch (CSS). The CSS aims to enable central clearing for all banks and other financial institutions, thereby increasing the convenience and reducing costs for customers and members of the switch. The CSS is also intended to support e-commerce transactions and innovative payment instruments and to increase the number of people with access to financial services. Finally, the NBC is piloting the Bakong system, a wallet-based platform employing a permissioned distributed-ledger technology (DLT) network. Bakong is currently designed for the execution of very small, low-value transactions. 39 World Bank Findex; https://globalfindex.worldbank.org/sites/globalfindex/files/countrybook/Cambodia.pdf. 40 Morgan and Trinh 2017. CAMBODIA ECONOMIC UPDATE | JUNE 2021 49 Special focus: Government-to-Person (G2P) payments for social benefits e-commerce is growing and digital financial services are becoming increasingly available, cash-on-delivery is often preferred to digital payment options. At the same time, several supply-side factors seem to be hindering rather than stimulating demand. For instance, acceptance of digital payments is still limited, and merchants have little incentive to accept cashless payments. Quick response (QR) codes, which are becoming prevalent in the region as a lower- cost way to quickly increase acceptance, are also being adopted in Cambodia; however, fragmentation and lack of interoperability are a concern. Pricing for some services may also be too high, especially for low- value transactions,41 although additional data and analysis are needed to confirm this. Innovation in some segments of the market, such as payments aggregation, gateway, and other back-end services, is limited. The payment system infrastructure in Cambodia has been developed significantly by the National Bank of Cambodia (NBC) over the last few years, but it remains fragmented and cannot support the effective delivery of social benefits. As described in box S.2, the NBC has launched and operates several retail payment systems. However, the fragmentation in the infrastructure still leaves Cambodia without a system that is well-established and that has broad enough participation to be considered a viable solution for the distribution of government benefits or other government payments in the country. In this context, the only available option to disburse funds quickly and effectively to those in need was indeed to leverage an existing network of agents to disburse physical cash. Wing has the most extensive territorial reach across the country, to which they were also able to add a commitment to set up new agents in any location that would not be well serviced in the first place. However, despite Wing being a provider of digital payment services, its innovative potential could not be fully put to use beyond the mere cash-out transaction.42 Moreover, moving forward, exclusive reliance on a single provider for the distribution of social benefits and other government payments clearly risks reinforcing the dominance of that one provider in the market. Box S.3. The market for retail payment services in Cambodia In recent years, Cambodia has been experiencing rapid growth in the payments and financial technology (“Fintech”) industry. Enabled by NBC’s new regulations, both banking and non-banking institutions have introduced a wide array of payment and money transfer options for individuals and businesses. By the end of 2018, 16 PSIs were granted licenses by the NBC to operate payment services, including money transfers in and out, bill payments, retail payments, online payments, and cross-border money transfers. Some of the more notable market players include Wing, True Money, Asia Wei Luy, PayGo, and PiPay. Competition among PSPs appears to be strong with no significant barriers to entry for new providers. With 41 banks, 16 PSIs, and 4 specialized bank there is a healthy number of providers in the market, offering a range of digital payment products. Many of the banks have launched or are in the process of launching mobile and online banking services for both personal and corporate customers.43 41 The cost of making very low-value transactions, across multiple use cases can be as expensive as 38 percent of the value of the transaction. This is exorbitant and could discourage lower-income individuals who are likely to send smaller amounts from using digital channels to do so (World Bank 2019). 42 It is worth noting here that a large part of transactions through the Wing network – also beyond social transfer – still consist of cash-based overt-the- counter payments. The COVID19 pandemic seems to have somewhat accelerated growth of fully digital transactions, but several challenges remain (consumer literacy and trust, smartphone penetration, adequate use cases etc.). 43 The National Bank of Cambodia – Financial stability Review https://www.nbc.org.kh/download_files/publication/annual_rep_eng/FSR-for- publication-final-22Apr2019.pdf 50 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Special focus: Government-to-Person (G2P) payments for social benefits In conclusion, the solution that was adopted, though practical given the circumstances, is anything but ideal for modernization, since it does not contribute to financial inclusion, does not provide beneficiaries with choices, and risks distorting competition in the payments market. Lessons can be distilled from the experience of the COVID-19 relief transfer with a view to undertaking future reforms of GPPs, as the National Social Protection Council is already in the process of doing. These include: • A program whose delivery mechanisms are essentially centered on the role of the heads of households, who may be the least prepared members of society to accept and use digital instruments, cannot be conducive to digitalization. More will need to be done to communicate with the youngest segments of the population about future program developments. • Greater efforts will have to be coordinated at the national level to promote the use of digital payment services and discouraging the use of cash, including through education and awareness initiatives on how to access and use digital payment services, how to use mobile wallets through mobile phones, and how digital channels enable users to make transactions, from transferring money to receiving salaries and financial assistance electronically from the government. • At the same time, it will be necessary to improve existing payment infrastructure and to use it more efficiently (the cases of Thailand44 and Jordan, see box S.4, could be helpful references from this perspective). These and other measures discussed in the next section should be considered strategically as ways not only to further strengthen the resilience of the economy and society to crises, but also to modernize GPP delivery services as part of a fast-developing economy, like Cambodia, and more broadly to facilitate access for all its population to digital financial services. Box S.4. The Case of Jordan: Lockdown but not shutdown In Jordan, the government and some of its key institutions seized the opportunity to shift financially excluded individuals to the realm of digital finance, increasing financial inclusion and the acceptance and spread of digitalized services. In the early days of the pandemic, the government announced its adoption of digital payment channels to replace cash, encouraging citizens and employers to use mobile wallets to conduct financial transactions. The Ministry of Labor called on employers to digitize the payment of salaries that were paid in cash before the pandemic. What made this transition to digital finance relatively smooth is the solid digital payments infrastructure in the country. Two key national institutions (the National Aid Fund and the Social Security Corporation) announced that aid and other types of payments would be made through bank or mobile wallet transfers only. Digital financial services, more specifically mobile wallets, took prominence in mid-March 2020, especially given the growing fear of contagion through contaminated cash. Jordan resorted to mobile payments. Many governmental and nongovernmental entities introduced mobile payments to beneficiaries to replace previously cash-based payments. As a result, the number of active mobile wallets in the Kingdom doubled over four months to over 1 million users. Source: JOPACC 2020. 44 The example of Thailand’s “Leave No One Behind” Income Compensation Program for Informal Workers could be useful in this respect. In Thailand, people could apply online and verify themselves using their national ID, subject to cross-checks from the Ministry of Finance to ascertain whether the national ID numbers submitted were active in other registries, indicating that the applicants should be excluded because they were formal workers or received other benefits. Government payments were made in the PromptPay national e-payment system to the accounts linked to the national ID numbers. (This information is preliminary and based on a World Bank internal study still in progress.) CAMBODIA ECONOMIC UPDATE | JUNE 2021 51 Special focus: Government-to-Person (G2P) payments for social benefits POLICY RECOMMENDATIONS Improving the social assistance landscape in Cambodia The COVID-19 relief transfer program has shown how effective social assistance can be in combating the adverse effects of the pandemic. Even after the pandemic ends, the impacts will linger. As the relief program ends, Cambodia will need to develop stronger social assistance programs to support the poor and vulnerable population, who are adversely affected by the current pandemic as well as other economic shocks and vulnerabilities in the future. The following steps could help move Cambodia in that direction. Increase the coverage of the IDPoor program. The current relief cash transfer program was limited by the scope of the IDPoor database, which covered fewer than one in five households. The adverse impacts of the pandemic extend beyond the 17 percent of the households currently identified by the IDPoor program. Among those excluded there may be near-poor or vulnerable households, micro- entrepreneur households, those working in the tourism sector, those relying on migrant incomes sent by their family members, and so on. The lack of a database with broad coverage, beyond the IDPoor database, limited the ability of the government to target social assistance more efficiently and effectively. Develop an IDPoor database as a registry of potential beneficiaries for all social programs. An expansion in coverage of the IDPoor program will need to be accompanied by additional reforms to transform this into a social registry for all social programs. The necessary reforms include (i) modernizing the scoring system (such as using a proxy means test to generate welfare scores) to achieve a finer classification of households into various levels of poverty and vulnerability; (ii) linking the program to the national identification system and other administrative databases; and (iii) introducing shock response and vulnerability elements into the IDPoor instruments so that social programs can further target specific groups. Ensure the adequacy of existing program benefits. While receiving social assistance is important, the adequacy of the benefits is also important for effective social assistance. As seen above, the impact of social assistance increases with the amount of the transfer, and low transfer amounts may not be effective. For instance, the CTP-PWYC provides US$190 to women for seeking pre- and postnatal care over the course of three years. While the benefits may elicit health-seeking behavior, they are inadequate to improve maternal and child nutrition. Larger program benefits would be much more effective at supporting the poor and vulnerable to get out of poverty. Institute evidence-based social assistance to support the poor and the vulnerable. The relief program provided a good opportunity for Cambodia to learn about the importance and effectiveness of social assistance. The demand for sustained social assistance is evident. The RGC is currently planning to institute post-COVID-19 social assistance measures. The design of such programs and the parameters of support should be based on global as well as contextual evidence on their benefits and efficacy in supporting the poor and the vulnerable. Improving G2P payments in the current scenario As mentioned, the COVID-19 relief transfer program was effective in reaching a large number of beneficiaries within the short time available, dictated by the emergency. Some improvements could be considered for similar endeavors in the near future, assuming the current scenario is largely unchanged from a regulatory, infrastructure, and financial inclusion, and education perspective. The National Bank of Cambodia (NBC) should be considered an important stakeholder when discussing G2P payment mechanisms. The NBC is the overseer of the National Payments System (NPS). As such, the NBC should ensure the smooth, safe, and efficient functioning of the NPS, of which G2P payments are also a part. The NBC’s voice is particularly relevant in guiding other RGC agencies 52 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Special focus: Government-to-Person (G2P) payments for social benefits through the available options for disbursing G2P payments to identify the most efficient alternatives. This should also include how to leverage the NPS infrastructure (that is, the systems operated by the NBC). Also, given the magnitude of G2P programs, the NBC should assess the potential impact of the payment mechanism on competition in the payments market. Finally, the NBC should bring the financial inclusion perspective, as G2Ps payments are considered among the effective use cases that could help expand financial inclusion.45 Greater effort should be made to consider more than one provider for the distribution of G2P payments. When distributing G2P payments, an effective go-to option is often to leverage the agent network of the largest payment service provider in the country. While achieving the objective in the short term, especially when quick scale up is of essence, this can end up having a negative impact on the market for payment services in the country. G2P payments allow the leading provider to further strengthen its position in the market, further expand its network of agents or branches, and increase trust and brand recognition among the population. This in turn can make it even more challenging for other players to emerge, thereby distorting competition in the market. Eventually, this may even end up making future G2P programs more costly, as the dominant player may then be able to negotiate higher processing fees. Beneficiaries could be given the option of receiving the funds digitally onto an account or wallet. Cash is by far the preferred option of G2P beneficiaries in Cambodia, as seen above. However, distribution of social benefits should be seen as an important opportunity to advance adoption and use of transaction accounts and other financial services. G2P programs could be a unique opportunity for the RGC to promote financial inclusion in Cambodia, increasing the familiarity and trust of beneficiaries of social payments in digital instruments. While times may not be ripe for digital payment instruments to be the only (or even the default) option in Cambodia, given the low levels of financial literacy, giving beneficiaries at least the option to receive money into accounts or wallets could be a good first step. Improving G2P delivery: a potential future scenario G2P delivery could be further improved in Cambodia if a more substantial reform agenda were developed by the RGC. By embracing a more ambitious reform agenda and increasing coordination among different authorities, the RGC may be able to significantly improve the efficiency and effectiveness of G2P delivery in Cambodia in the near future. This could be developed following a similar approach as in Indonesia, where the government, with support from the World Bank, is developing a comprehensive set of reforms (known as G2P 4.0) to improve G2P delivery mechanisms in the country. The NPS infrastructure operated by the NBC could be leveraged for the distribution of G2P payments in Cambodia. The NBC operates several payment systems (see box S.2), some of which may have the capability to disburse funds into multiple bank accounts or e-money wallets at once (that is, batch payments). This feature would allow the government to disburse social benefits quickly and efficiently into the beneficiary accounts. The broad participation of banks and non-bank payment service providers in the relevant payment system would allow maximizinz the benefits of this approach. The current fragmentation of the NPS infrastructure may hinder such broad participation; hence, the NBC should review the overall architecture of the NPS holistically and strategically. Beneficiaries of social payments could be given a full choice of provider and payment methods. This would stimulate competition in the market and could motivate payment service providers to develop specific products aimed at expanding their customer base among the low-income population. For instance, at some points during the distribution of COVID-19 relief transfers, the demand for savings was over 10 percent,46 but this demand was not met by any product offering since beneficiaries could only withdraw 45 BIS and World Bank. 2016. 46 In rounds 2 and 4 of the survey, 10 and 11 percent of households, respectively, indicated they were interested in saving some of the funds received through the program. In round 5, the percentage dropped to only 3 percent, perhaps due to a worsening of the pandemic in the country. However, this makes the case for adequate product offerings even stronger, as some households could have saved in e-wallets some of the benefits received during better times. (Source: Cambodia COVID-19 High-Frequency Phone Survey, World Bank, European Union, and Australian Aid, 2020–2021.) CAMBODIA ECONOMIC UPDATE | JUNE 2021 53 Special focus: Government-to-Person (G2P) payments for social benefits cash. At first, to ensure a smooth transition and avoid the possibility that anyone in need of funds is unable to receive them, the option to receive cash could be maintained. However, the option to receive the funds into an account should be considered the default method. Financial education and consumer protection should be an imperative part of this reform effort. As new customers are reached by financial services with which they were not previously familiar, it will be critical to accompany them in the process, taking the opportunity to provide basic financial education for the beneficiaries. Consumer protection, including adequate redress mechanisms, should also be in place to ensure beneficiaries can easily resolve any issue with the service provided. Government payment programs in Cambodia: a strategic approach to reforms The experience with emergency assistance during COVID-19 is an opportunity for the RGC to reform its payment programs in the context of the review of the country’s system of social benefits. The share of individuals receiving payments from the government digitally in Cambodia is dramatically low—only 2.9 percent compared to 12.2 percent in East Asia and Pacific and 8.8 percent in lower middle-income countries.47 As a first step, the RGC could undertake a landscaping exercise, mapping all government payment flows (including, for instance, civil service wages, social security benefits, tax-related payments, payments to and from businesses), and identify for each flow, and for the system as a whole, the steps needed to achieve digitization. Government Payment Programs (GPPs) should support the sound, efficient, and transparent management of public financial resources. In addition, efforts to modernize GPPs should be leveraged to accelerate the development of the NPS more broadly and to promote financial inclusion. They should therefore be safe, reliable, and cost-effective. More broadly, digitizing GPPs should be a priority, requiring a concerted whole-of-government approach to implement them in the medium term. Governments can do a lot to support both the supply and delivery side of GPP services and to encourage the demand for such services from the public. However, this requires using a holistic approach to GPP reform and the coordination of a large set of actions to be taken on several fronts, given the relevance of the challenges that may hamper the transition to digital GPPs.48 An increasing number of countries have initiated the transition to digital GPPs, yet in some cases the process has been stifled by bottlenecks, including ineffective systems or inadequate policies that have limited the incentives or capacities necessary to achieve the desired objectives. Failure to resolve these issues may risk not only slowing the transition process, but also damaging the credibility of the government plans in the eyes of the citizens and weakening public confidence in payment innovations.49 In the medium term, the RGC should commit to achieving the highest quality of GPP delivery. This will include ensuring that (i) all components of GPP delivery are digitalized end to end, and (ii) all government payments from and to all individuals and businesses in the country reach the right party,50 for the right purpose, at the right time, in the right place, and in the right form, in a safe and efficient manner, and in the correct amount; and (iii) GPPs evolve over time so as to promptly satisfy the changing needs of the economy and society. The following recommendations describe how this ambitious, yet realistic, vision could be achieved in the medium term in Cambodia. An integrated approach should link the transition to digital GPPs with NPS modernization and financial inclusion, in the context of Cambodia’s economic development and financial stability. This implies that as Cambodia develops its NPS infrastructure (especially the retail segment) and pursues financial inclusion, the transition to digital GPPs should be considered as a key pillar supporting both 47 World Bank Global Findex 2017. 48 For a comprehensive discussion of these challenges and how they have been addressed in selected country cases, see Karandaaz Pakistan (2016). 49 Structural weaknesses such as poor connectivity (causing numerous instances of dropped or failed transactions), the lack of account-to-account interoperability (reducing the space of payments across the economy), or an insufficient network of cash-out points across the country may severely diminish the value proposition of digital GPPs. 50 In the case of G2P payments, a party is an individual or legal person; in the case of P2G, a party would be a government agency. 54 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Special focus: Government-to-Person (G2P) payments for social benefits objectives.51 Similarly, the government should act strategically and involve all relevant NPS and financial inclusion stakeholders both to ensure full consistency among GPP plans, NPS development, and financial inclusion, and to exploit maximum synergies from their integration. In principle, the full business process of digital GPP delivery can be digitalized, not just its payment component. Digitalizing payments, only, would not be enough to generate the full efficiency gains that are expected from the transition to digital GPPs, since people receiving or making payments from or to the government might still need to spend unnecessary time submitting paper documents (such as certificates, forms, records) and having such documents validated by government officials. In situations like that, electronic payment solutions would not eliminate the need for consumers to go to government offices and stand in long lines, which diminishes the value of electronic payments.52 Nor do electronic payment solutions by themselves fully address governance and control issues (for example, protection from misuse of funds, fraud, or corruption), as they merely shift the point at which unauthorized third parties or criminal actors may skim off part of the funds exchanged. Instrumental to achieving the strategic objective as operationalized above is that GPPs be made “end-to-end digital,” that is, the exchange of value underpinning them should be digital from initiation to fund transfer to settlement and disbursement.53 This requires that the transition to digital GPPs be coordinated with the e-government agenda, so that all components of GPP service delivery are treated integrally within the transition plan to digital GPPs. The RGC should adopt a neutral approach to technology and take on a developmental orientation to digital GPPs. Ultimately (and ideally), every individual or business agent should be able to make or receive government payments using any means, through any provider of choice, and to and from any place in the country. Multiple options (in terms of instruments, channels, and providers) should be available to all users, and the rise of alternative options as well as of preferences leading to choices should be left to the interplay of market demand and supply. The government should facilitate such market interplay and create the conditions for promoting the greatest range of choices possible. In the context of a realistic and gradual approach, however, government should at a minimum ensure that all citizens and businesses, everywhere in the country, should be able to conveniently access at least one basic type of electronic payment channel (including also through the help of PSP agents) for the purpose of making or receiving government payments. Implementing the comprehensive set of reforms proposed here would have several practical and measurable outcomes. These include (i) lower transaction costs, (ii) improved management of public funds, (iii) less leakage and loss of interest on private and public funds lying idle in intermediary accounts, (iv) less time spent on the processing of administrative practices and payment execution, (v) elimination of the need for one-on-one relationships between GPPs and financial institutions, (vi) detection and elimination of ghost beneficiaries and duplications, (vii) higher volumes of electronic payments, and (viii) higher numbers of people reached by formal finance. 51 As noted, this is the approach currently recommended or adopted by the World Bank Group in the context of its advisory and technical assistance activities. Specifically, Guideline 10 of the World Bank’s General Guidelines for the Development of Government Payment Programs recommends that governments “Leverage on government payment programs to promote financial inclusion: the large volume of payments issued by governments, as well as the nature of some specific programs like social spending programs, represents an opportunity to promote or facilitate financial inclusion on a large scale.” 52 The actual transfer of funds is only part of a GPP transaction. If the full process is not fully digitalized, the digital GPP payment is unlikely to be transformational. For example, annual business registration and tax payments may require long lines. Also, there may be separate lines for handing over documents for a tax assessment, for obtaining forms that must be filled out to make payments, for receiving an official signature or stamp on the form, and another for making the actual payment. A digital GPP service can solve only the very last part of the process, causing consumers to still have to stand in multiple lines. In this scenario, the ability to make a digital payment does not save the consumer that much time. A process that allowed users both to execute payments electronically and to receive validated documents online would offer considerable time and cost savings. 53 A fully digital experience brings greater value to the system than GPP delivery mechanisms that, while partly automated, still feature similar characteristics of a cash-based system (for example, involvement of agents and physical presence). CAMBODIA ECONOMIC UPDATE | JUNE 2021 55 56 ANNEX. SELECTED INDICATORS SELECTED INDICATORS 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 E 2021 F INCOME AND ECONOMIC GROWTH GDP growth (annual %) 6.7 0.1 6.1 7.1 7.3 7.4 7.1 7.0 6.9 7.0 7.5 7.1 -3.1 4.0 GDP per capita growth (annual %, real) 5.1 -1.4 4.5 5.4 5.6 5.6 5.4 5.3 5.3 5.4 5.9 5.5 -4.4 2.6 GDP per capita (US$, nominal) 744.5 737.9 812.9 892 950 1,028 1,100 1,175 1,270 1,381 1,506 1,640 1,519 1,609 Private Consumption growth (annual %) 12.7 -0.2 8.8 10.4 4.7 5.6 4.6 9.4 5.8 3.7 3.0 7.0 -0.8 2.6 Annex. Selected indicators Gross Investment ( % of nominal GDP) 17.3 20.1 16.2 16.0 17.4 18.7 20.9 21.4 21.7 21.9 22.6 23.4 24.6 27.6 Gross Investment - Public ( % of nominal GDP)1 6.3 8.8 9.6 10.7 9.1 9.1 8.2 6.9 6.7 6.8 6.7 7.7 11.4 10.8 MONEY AND PRICES 2 Inflation, consumer prices (annual %, period average) 12.3 3.1 2.6 3.4 1.4 2.2 1.2 1.8 3.5 3.3 3.1 3.2 2.9 3.0 Broad Money (% of GDP)1 28.3 37.7 41.6 39.1 50.1 55.5 67.1 72.4 79.2 88.2 100.7 107.7 137.5 142.0 Domestic Credit to the Private Sector ( % of GDP)1 23.5 24.6 27.6 28.3 38.7 52.0 62.7 74.3 81.7 86.7 99.6 114.2 .. .. Nominal Exchange Rate (local currency per USD) 4,060.0 4,140.0 4,044.0 4,016.0 4,033.0 4,027.0 4,030.0 4,025.0 4,058.0 4,062.0 4,067.0 4,070.0 4,077.4 4,070.0 Real Exchange Rate Index (2015=100) 91.4 90.8 98.1 94.3 93.3 92.6 94.7 100.0 101.9 103.2 99.7 101.0 96.8 98.9 FISCAL Revenue (% of GDP) 16.4 15.9 17.7 17.6 17.7 18.2 20.0 19.7 20.9 21.9 23.8 27.0 24.1 22.7 Expenditure (% of GDP) 16.1 20.5 21.0 23.0 21.9 21.4 21.9 20.2 21.1 22.7 23.4 25.5 26.8 26.0 Interest Payments (% of GDP) 0.2 0.2 0.3 0.3 0.5 0.7 0.7 0.3 0.4 0.4 0.4 0.4 0.6 0.5 Non-Interest Expenditure (% of GDP) 15.9 20.3 20.7 22.7 21.4 20.7 21.2 19.9 20.7 22.3 23.0 25.1 29.4 29.3 Overall Fiscal Balance (% of GDP) 0.3 -4.6 -3.3 -5.4 -4.2 -3.2 -1.9 -0.5 -0.2 -0.8 0.4 1.5 -2.7 -3.3 CAMBODIA ECONOMIC UPDATE | JUNE 2021 Primary Fiscal Balance (% of GDP) 0.5 -4.4 -3.0 -5.1 -3.7 -2.5 -1.2 -0.2 0.2 -0.4 0.8 1.9 -2.1 -2.8 General Government Debt (% of GDP) 27.0 28.5 28.7 29.7 31.5 31.7 31.9 31.2 29.1 30.0 28.4 28.1 34.6 35.2 1 External Public Debt (% of GDP) 24.5 26.3 27.1 26.9 30.4 31.5 31.4 31.2 29.1 30.2 28.7 28.1 34.6 35.2 EXTERNAL ACCOUNTS Export growth, G&S (nominal US$, annual %) 20.2 -24.4 22.9 11.4 16.0 16.8 10.3 7.5 9.0 9.4 12.3 9.5 -4.0 18.9 Import growth, G&S (nominal US$, annual %) 11.3 -17.0 19.1 11.4 14.2 16.9 8.8 7.6 9.0 7.8 9.3 9.0 -3.9 23.2 Merchandise exports (% of GDP) 49.4 33.9 38.3 38.8 41.6 44.6 45.4 45.4 45.5 45.2 46.0 46.0 48.2 48.8 Merchandise imports (% of GDP) 58.2 46.8 50.4 50.5 53.7 57.5 57.5 57.3 56.9 55.6 55.1 54.6 56.5 57.3 Services, net (% of GDP) 6.5 6.2 6.8 6.3 7.3 7.8 7.7 7.5 7.0 7.0 7.4 7.2 6.8 4.2 Current account balance (current US$ millions) -622.3 -1,120.4 -1,165.3 -1,309.3 -1,390.7 -1,489.3 -1,899.7 -1,680.6 -1,756.6 -2,140.5 -2,180.1 -2,632.5 -2,525.5 -2,663.3 Current account balance (% of GDP) -6.0 -10.8 -10.0 -10.1 -9.9 -9.6 -11.3 -9.2 -8.8 -9.7 -8.9 -9.7 -9.9 -9.8 Foreign Direct Investment, net inflows (% of GDP) 7.6 8.8 11.9 11.6 13.9 13.0 10.5 9.5 12.0 12.1 12.6 13.2 13.7 13.8 External debt, total (% of GDP)1 25.5 31.7 35.6 36.2 47.9 49.9 49.7 52.2 50.2 51.5 55.0 56.6 .. .. Multilateral debt (% of total external debt)1 .. .. .. .. .. .. .. .. .. .. .. .. .. .. Debt service ratio (% of exports goods and non- 0.8 1.0 1.1 4.0 6.0 5.7 5.4 5.1 5.1 6.2 6.7 6.9 .. .. factor services)1 POPULATION, EMPLOYMENT AND POVERTY Population, total (millions) 13.9 14.1 14.3 14.5 14.8 15.0 15.3 15.5 15.8 16.0 16.2 16.5 16.7 16.9 Population Growth (annual %) 1.5 1.5 1.6 1.6 1.6 1.7 1.7 1.6 1.6 1.5 1.5 1.5 1.4 1.4 Unemployment Rate1 0.8 0.6 0.8 0.6 0.5 0.4 0.7 0.4 0.7 0.7 0.7 0.7 0.7 .. Inequality - Gini Coefficient1 .. .. .. .. .. .. .. .. .. .. .. .. .. .. Life Expectancy1 65.4 66.0 66.6 67.0 67.5 67.9 68.3 68.6 69.0 69.3 69.6 .. .. .. OTHER GDP (current LCU, millions) 41,968,385.0 43,056,732.0 47,047,985.0 52,068,693 56,616,800 62,219,524 67,740,436 73,422,702 81,241,866 89,830,525 99,544,275 110,014,048 103,511,609 110,763,826 GDP (current US$, millions) 10,337.0 10,400.2 11,634.0 12,965 14,038 15,451 16,809 18,242 20,020 22,115 24,476 27,030 25,484 27,215 GDP per capita LCU (real) 2,062,211.6 2,033,232.3 2,124,292.2 2,238,619 2,363,486 2,495,841 2,630,660 2,769,140 2,915,146 3,071,748 3,252,348 3,431,774 3,279,153 3,365,284 3 Doing Business Rank .. .. .. .. .. .. .. .. .. .. .. 144 .. .. Human Development Index Ranking4 142.0 142.0 143.0 143 145 144 144 146 146 145 144 144 .. .. CPIA (overall rating)1 3.3 3.3 3.4 3.4 3.5 3.4 3.4 3.4 3.4 3.4 3.4 3.4 .. .. Economic Management1 3.8 3.8 4.0 3.8 3.8 3.8 3.8 4.0 4.0 4.0 4.2 4.2 .. .. Structural Policies1 3.3 3.3 3.3 3.5 3.7 3.7 3.7 3.5 3.5 3.3 3.3 3.3 .. .. Policies for Social Inclusion and Equity1 3.3 3.3 3.4 3.5 3.5 3.4 3.4 3.4 3.4 3.4 3.4 3.5 .. .. 1 Public Sector Management and Institutions 2.7 2.7 2.7 2.8 2.8 2.8 2.8 2.7 2.7 2.7 2.6 2.6 .. .. Notes: “..” indicates not available. E = estimate, F = forecast. Data from MFMOD unless otherwise noted 1/ World Development Indicators Database and World Bank Staff Estimates 2/ World Bank GEM database; MRV = Most recent value 3/ This indicator is ranked out of 190 countries (Doing Business 2019). Data are presented for survey year instead of publication year. Doing Business rankings change over time, due to both methodology and policy changes. 4/ The HDI ranking in 2001 is in relation to 175 countries and in 2010 in relation to 169 countries. Methodological enhancements in HDI calculations have resulted in notable improvements in the countries’ rankings. Sources: MFMOD Database, World Bank WDI and GEM databases, IMF. Annex. 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