C mbodi Economic Upd te M 2023 Post-COVID-19 Economic Recover SPECIAL FOCUS From Spendin More to Spendin Better – Tow rd Improved Hum n Development Outcomes Cambodia Economic Update May 2023 Post-COVID-19 Economic Recovery SPECIAL FOCUS From Spending More to Spending Better –  Toward Improved Human Development Outcomes Contents Acknowledgments vi Abbreviations vii Part 1: Recent Economic Developments and Outlook 1 Executive Summary 1 Recent developments 6 Pent-up consumer demand boosted the services sector 6 Cambodia’s goods exports started contracting in recent months 7 The decline in goods exports to the U.S. and EU markets accounted for 9 95 percent of total decline The total investment amount of approved FDI projects slowed 10 Construction permits rose for the first time since 2019 12 The recovery of tourism activity is picking up speed 13 Agricultural GDP is estimated to have marginally increased 15 Agricultural export performance improved 16 Consumption strengthened, driven by pent-up consumer demand 17 Inflation has significantly eased, returning to pre-shock levels 17 The current account balance improved as the oil price shock eased 18 Broad money growth continued to decelerate 19 Credit growth slowed signficantly, but concentration of credit in 19 real estate remained Pressure on domestic interest rates continued 20 The banking system remained resilient 21 ii CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY Domestic revenue fully recovered and continued to increase 21 Despite fiscal consolidation efforts, budget expenditure marginally increased 22 The across-the-board public sector wage increase is reintroduced 23 Last year’s fiscal deficit is estimated to have narrowed to 4.7 percent of GDP 24 Public debt stock reached 33.7 percent of GDP, of which 99.8 percent is 24 public external debt Part 2: Special focus 29 From spending more to spending better – Toward improved human 29 development outcomes Introduction 29 Expanded public spending supported by strong domestic revenue 30 Availability of fiscal space enabled higher spending, especially in social sectors 31 After a decade of compensation reform and salary increases, the average 32 public sector wage now exceeds the average private sector wage Education spending increased but has yet to translate into better 36 learning outcomes Public health policy effectiveness is limited by low public health spending, 41 low utilization rates of public health facilities, and high levels of out-of-pocket spending Conclusions and recommendations 48 Annex 1: Cambodia – Selected Indicators 50 Bibliography 52 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY iii Boxes Box 1. Global economic developments and outlook 8 Box 2. What more can be done to improve the contribution of FDI to the economy? 11 Box 3. Linking the “fourth economic pole” to the international gateways 14 Box S.1. Spending under Chapter 62 (Social benefits expenses) 42 Figures Figure ES.1 Cambodia’s Recent Developments at a Glance 5 Figure 1 Economic recovery solidified 6 Figure 2 Goods exports contracted 7 Figure B1.1 Inflation 8 Figure B1.2 Potential growth 8 Figure 3 Contribution to goods export growth 9 Figure 4 Goods exports diversification continued 9 Figure 5 Investment appetite eased 10 Figure 6 Approved FDI-financed projects, by sector 10 Figure B2.1 Rise in nearshoring and supply chain diversification 11 Figure B2.2 Cambodia’s FDI by sector 11 Figure 7 Approved construction permit value improved 13 Figure 8 Volume of construction material imports remained subdued 13 Figure B3.1 The fourth economic pole 14 Figure 9 International arrivals and Angkor revenue quickly recovered 16 Figure 10 Agricultural exports – unrealized agroprocessing potential 16 Figure 11 Inflation eased after surging 17 Figure 12 Inflation in Cambodia’s main trading partners 17 Figure 13 The current account improved 18 Figure 14 The riel-U.S. dollar exchange rate was under pressure 18 Figure 15 Broad money growth decelerated 19 Figure 16 Concentration of credit in real estate 19 Figure 17 Domestic interest rates continued to increase 20 Figure 18 Liquidity coverage ratios of banks and microfinance 21 deposit-taking institutions Figure 19 Contributions to domestic revenue increase 21 Figure 20 Budget expenditure decelerated amid fiscal consolidation efforts 22 Figure 21 The general government deficit 24 Figure 22 General government surplus/deficit and financing 24 Figure S.1 Government overall budget at national level, by category (Riels, million), 29 2011–21 Figure S.2 Government overall revenue and expenditure increase, 2011–22 30 Figure S.3 Government overall budget increased between 2011 and 2022 31 Figure S.4 Monthly average pay of Cambodian civilian civil servants, 2021 32 iv CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY Figure S.5 Footprint of the public wage bill 32 Figure S.6 Public sector wage premium 33 Figure S.7 Cambodia’s public sector wage premium over time 33 Figure S.8 Wage premium by education level (compared to private formal workers) 34 Figure S.9 Public sector wage premium by occupational group 34 Figure S.10 Gender wage gap in Cambodia 35 Figure S.11 Economic classification of MoEYS budget 36 Figure S.12 MoEYS recurrent and capital expenditures, 2017–21 37 Figure S.13 Planned capital spending and budget outturn 38 Figure S.14 Government expenditures on education: Percent of GDP compared to 38 gross national income per capita, 2020 Figure S.15 Net enrollment rate, urban and rural areas, 2009–2019/20 39 Figure S.16 Cambodia literacy rate, and compared with its ASEAN peers 39 Figure S.17 Learning outcomes for Grade 6, 2013–21 40 Figure S.18 Percentage of Grade 8 students proficient in Khmer reading and 40 mathematics, 2014–17 Figure S.19 MoH budget expenditures, 2017–22 41 Figure S.20 MoH budget, by category (% of total), 2017–22 41 Figure S.21 MoH recurrent budget, by economic classification (Riels, million), 2017–21 42 Figure S.22 MoH budget on social benefits expenses, by economic classification 42 (Riels, million), 2017–21 Figure S.23 Cambodia’s health spending compared to its ASEAN peers, by health care 43 function, (% of government health expenditure), 2019 Figure S.24 Type of health provider consulted first 43 Figure S.25 Health expenditure (% of GDP) 44 Figure S.26 General government health expenditure per capita, purchasing power parity 44 Figure S.27 Domestic general government health expenditure 44 Figure S.28 Cambodia health financing and reliance on OOP expenditures, 2000–20 45 Figure S.29 Trends in immunization coverage and childhood mortality 46 Figure S.30 Life expectancy and child mortality rates, Cambodia compared to 46 ASEAN peers Figure S.31 Infant and under-5 mortality, urban compared to rural 47 Figure S.32 Infant and under-5 mortality rates, richest compared to poorest quintile 47 Tables Table ES1 Real growth projections 3 Table B2.1 Investment policies 12 Table B3.1 The main northwestern crop-producing provinces 14 Table 1 Public debt stock, newly signed loans, and loan disbursements 25 Table 2 The macro outlook indicates continued economic recovery 26 Table S.1 Summary of recommendations 45 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY v Acknowledgements The May 2023 Cambodia Economic Update The CEU, produced biannually, provides up- (CEU) was prepared by Sodeth Ly, Serdar to-date information on macroeconomic Yilmaz, Sokbunthoeun So, and Khy Touk developments in Cambodia. It is distributed and with contributions from Samuel Christopher discussed widely including among Cambodian Hill, Peter Kusek, Gerlin May U. Catangui, authorities, development partners, the private Runsinarith Phim, Lindley Higgins, Paul Jacob sector, think tanks, civil society organizations, Robyn, Kimsun Tong, Fata No, Flavia Giannina and academia. Sacco Capurro, and Tim L. De Vaan. Chankesey Heav served as a research assistant. Seakheang For information about the World Bank and its Heng provided administrative support. Saroeun activities in Cambodia, please visit our website Bou helped with the press release, web display, at www.worldbank.org/cambodia. and dissemination events. To be included in the email distribution list of The team worked under the overall guidance the CEU and related publications, please contact of Sebastian Eckardt and Alma Kanani. The Seakheang Heng (sheng4@worldbank.org). For team is grateful for the advice and comments questions on the contents of this publication, provided by Hassan Zaman, Mariam Sherman, please contact Saroeun Bou (sbou@worldbank.org). and Maryam Salim. Several colleagues provided comments on the draft version including The findings, interpretations, and conclusions Aaditya Mattoo, Ergys Islamaj, and expressed in this report do not necessarily reflect Kim Alan Edwards. the views of the Executive Directors of the World Bank or the governments they represent. The The team is grateful to the Cambodian World Bank does not guarantee the accuracy of authorities, particularly the Ministry of Economy the data included in this work. The boundaries, and Finance and the National Bank of Cambodia, colors, denominations, and other information for their cooperation and support. The report shown on any map in this work do not imply also benefited from the advice, comments, and any judgment on the part of the World Bank views of various stakeholders in Cambodia, concerning the legal status of any territory or the including its enthusiastic readers and critics. endorsement or acceptance of such boundaries. vi CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY Abbreviations ASEAN Association of Southeast Asian Nations CEU Cambodia Economic Update COVID-19 coronavirus disease 2019 CPI Consumer Price Index CR Cambodian riel CSES Cambodia Socio-economic Survey DP development partner EAP East Asia and Pacific region EMDEs emerging market and developing economies EU European Union FDI foreign direct investment FED U.S. Federal Reserve GDP gross domestic product GTF garment, travel goods, and footwear MEF Ministry of Economy and Finance MoEYS Ministry of Education, Youth and Sport MoH Ministry of Health NSSF National Social Security Fund OOP out-of-pocket PISA-D Program for International Student Assessment for Development QIP Qualified Investment Project U.S. United States US$ United States dollar VAT value-added tax YTD year to date y/y year on year CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY vii ©World Bank CHAPTER 1 Recent Economic Developments and Outlook Executive Summary started to accelerate for the first time since COVID-19, reaching US$802 million or a 484 percent year-on-year (y/y) increase during the Recent developments first two months of 2023. Cambodia’s economic recovery solidified in Weakening external demand is, however, 2022 with real growth accelerating to 5.2 starting to weigh on the country’s economic percent. After shifting to “living with COVID-19” recovery. Global growth is slowing sharply in in late 2021, the economy is firmly on a path the face of elevated inflation, higher interest to recovery and has now returned to its pre- rates, reduced investment, and disruptions pandemic growth trajectory. caused by Russia’s invasion of Ukraine. Thanks largely for the decline in exports to the U.S. and Initially led by the strong performance of EU markets, total goods exports contracted at export-oriented manufacturing, growth drivers 14.2 percent y/y during the first two months are rotating to the services and agriculture of 2023, compared to an average growth rate sectors. Driven by pent-up consumer demand, of 6.7 percent in 2019. Of the 14.5 percent the overall contribution of the services sector to decline, garment exports contributed the largest, economic growth is returning to the 2019 levels. accounting for 11.8 percentage points. Approved Underpinned by the complete removal of COVID- foreign direct investment (FDI)-financed project 19-related mobility restrictions and China’s recent value also shrank to US$156 million, contracting reopening, international arrivals have picked up, at 92.3 percent during the first two months reaching 830,000 during the first two months of of 2023. Of the total US$156 million, US$83 2023, approaching pre-pandemic levels. million (60 percent) went to the garment industry, while the remaining US$73 million (40 Meanwhile, the agriculture sector is benefitting percent) financed the travel goods, footwear, and from improved access to regional markets, packaging industries. thanks to newly ratified bi-lateral and regional free trade agreements. In addition to traditional Despite weakening goods export performance, agricultural commodities such as rice, cassava, the current account balance is improving, and rubber, fresh mango and banana exports, thanks to the rebound in the travel and especially to the Chinese market, have emerged. tourism industry and remittances, while the oil Banana exports quickly rose to US$182 million price shock eased. In 2022, the current account in 2022, up from US$49.3 million in 2019. There deficit improved to an estimated 26.3 percent are also signs of a pick up in the construction of gross domestic product (GDP), as the trade and real estate sector which was a major, albeit deficit narrowed, thanks to strong exports. The not necessarily sustainable growth driver before current account balance continued to be mainly COVID-19. While uncertainty in the housing financed by capital inflows and international market remains high, construction permit values reserves. Gross international reserves, therefore, CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 1 CHAPTER 1 Recent Economic Developments and Outlook declined to US$17.7 billion, covering about seven halved, declining to 7.5 percent y/y in February months of imports in February 2023, down from 2023, down from 15.8 percent during the same US$20.3 billion during the same period in 2022. period in 2022. While remaining strong, growing much faster than the nominal GDP growth rate, Inflation eased significantly, while the domestic credit growth also eased, expanding at exchange rate has been stable, underpinning 14.8 percent y/y in February 2023, down from domestic consumption. Cambodia’s Consumer 22.6 percent during the same period in 2022, Price Index (CPI) declined to 2.2 percent y/y thanks to rising borrowing costs. in February 2023, after peaking at 7.8 percent y/y in June 2022, as energy and food prices The economic recovery and good revenue stabilized. Thanks to the central bank’s open administration underpinned an across-the- market operations, the nominal exchange rate board improvement in domestic revenue has been broadly stable, hovering at 4,100 riel collection. In 2022, general government revenue per U.S. dollar. Moderating inflation helped boost collection surged, expanding at 19.5 percent, domestic consumption. During the first two helping contain the overall fiscal deficit, which months of 2023, quantity imports of consumer is estimated to have narrowed to 4.7 percent of goods such as gasoline, alcohol, cooking oil, and GDP. As a result, government deposits (fiscal sugar accelerated, growing at 28.1 percent, 16.7 reserves) rose to 17.8 percent of GDP (21.9 percent, 79.7 percent, and 49.6 percent y/y, trillion riel), up from 17.6 percent of GDP (19.5 respectively. Similarly, value imports of durable trillion riel). In the past decade, improvements in goods such as passenger cars and buses rose to the fiscal space as a result of a rapid expansion 6.6 percent and 127.1 percent y/y, respectively. of domestic revenue allowed the government to boost spending in the health and education Financial conditions tightened, as Cambodia sectors. In addition, Cambodia’s budget “imports” U.S. monetary policy, thanks to its allocation boost was driven partly by across- highly dollarized economy. Rising U.S. interest the-board salary increase for its civil servants. rates pushed up domestic interest rates. The Average monthly public sector pay is now higher 12-month (weighted average) U.S. dollar deposit than private sector pay. Cambodia is currently and lending rates rose to 5.54 percent and 10.19 among the countries with the highest share of percent, respectively in February 2023, up from its general government revenues spent on the 3.94 percent and 9.51 percent, respectively public wage bill (see the Special Focus section). during the same period in 2022. Given lags in monetary policy transmission, the full impact The authorities continued to provide cash on activity of the current monetary policy transfers for poor and vulnerable households, tightening cycle has yet to fully materialize. although the worst of the pandemic is now Going forward, the tightening cycle will likely behind us. In this regard, the Cambodian hurt investment and consumer spending. authorities have extended the COVID-19 cash transfer program, with an additional budget of Broad money growth decelerated to 6.8 percent roughly US$400 million. As of March 2023, it y/y in February 2023, down from 14.5 percent had disbursed US$994 million since the launch during the same period in 2022, possibly in June 2020. In addition, the authorities have caused by global financial condition tightening. launched new cash transfer programs for The deceleration of broad money growth was households at risk due to inflationary pressures driven mainly by the easing of foreign currency and severe flooding. In the first round of deposit growth, reflecting slower capital inflows. implementation, the cash transfer under the The contribution by foreign currency deposits, inflationary pressure scheme disbursed US$9.12 the main component accounting for more than million and benefited 261,000 households. 80 percent of broad money, declined to 5.7 The cash transfer program under the flooding percentage points in February 2023, down from scheme was completed by March 2023, 11.7 percentage points during the same period disbursed US$11.6 million, and benefited 99,000 in 2022. Similarly, private sector deposit growth households. 2 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 1 Recent Economic Developments and Outlook Outlook Challenges and risks Cambodia’s real GDP growth for 2023 is The outlook is, however, subject to downside projected to accelerate further, reaching 5.5 risks. An extended slowdown in external percent (see table ES1). Despite the easing of demand could weaken Cambodia’s export- goods exports, the current account deficit is oriented manufacturing, which generates expected to improve to 19.3 percent of GDP about 40 percent of total employment in the on the back of the recovering services exports, industrial sector (17.3 percent of total non- especially tourism receipts and remittances. farm employment). Continued global financial Despite the recent decline in approved FDI tightening could affect the highly leveraged projects, continued robust capital inflows and financial sector, which has been partly behind the concessional financing will continue to largely recent construction boom. A renewed oil price cover external financing needs. shock may stoke inflation and dampen domestic consumption. Domestically, concentration of In 2023, the fiscal deficit is expected to domestic credit in the construction sector widen to 6.4 percent of GDP. Revenue, remains a key risk to financial stability. including grants, is improving, and is projected to remain strong, reaching 23.5 percent of GDP. On the upside, stronger-than-expected global Expenditure is expected to increase to 29.9 growth could mitigate the downside drag percent of GDP, thanks to rising post-pandemic of weak external demand. A stronger-than- operating expenses that include an across- expected rebound in China could bolster stronger the-board public sector wage increase and an tourism receipts, exports, and FDI inflows increase in goods and services expense as well as which could help offset the expected decline in general election-related spending and the hosting advanced economies to a greater extent than of the Southeast Asian Games and the ASEAN assumed in the baseline. In addition, growth in Para Games. advanced economies, while likely slower than last year, may also turn out to be stronger than Over the medium term, the economy is expected, dampening the projected decline in expected to trend back to potential, growing at exports. 6 percent. Goods and services exports and FDI inflows are expected to be bolstered by the newly ratified free trade agreements; a substantial Policy options increase in private and public investment in key physical infrastructure such as seaports Macroeconomic policy should continue to and roads, especially under public-private support growth and employment, while partnerships; and structural reforms. Poverty maintaining macro-financial stability. This is expected to decline due to the projected has become more challenging in the context economic recovery and moderating inflation. of tightening financial conditions and rising private debt levels. But inflation has quickly retreated to pre-pandemic levels, allowing the Table ES1 Real growth projections authorities to continue with accommodative monetary policy by maintaining or lowering the reserve requirement ratio. While fiscal Change from Projections March 2023 consolidation will be necessary over the medium term, this consolidation can proceed at a relatively gradual pace given manageable public 2023 2024 2025 2023 2024 2025 debt levels. Cambodia has the fiscal space to Real maintain or even increase growth-enhancing growth spending on connectivity infrastructure and 5.5 6.1 6.3 0.3 0.4 0.2 human development which will boost the productive capacity of the economy over CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 3 CHAPTER 1 Recent Economic Developments and Outlook the longer term. Continuing to provide social can be improved. Given concerns around shadow assistance to the poor, while stemming the banking activities, such as credit issued by learning loss that Cambodia experienced during construction or real estate developers to buyers the time of COVID-19 and building back better, of residential real estate, it will be of critical is also necessary to promote inclusive growth. importance to collect the data necessary to Accompanying increased public investments with monitor and assess the legality of these activities. steps to enhance value for money and spending efficiency would ensure high spending translates To enhance the long-term resilience and into better outcomes, as discussed in more detail competitiveness of the economy, efforts are in part 2 of this report. needed to further promote export product diversification. Unlike other countries in the Safeguarding financial stability also remains region, Cambodia has had limited success in a priority. The recent rapid credit growth diversifying outside of garments, footwear, and relatively high private sector debt, with a while the country’s agroprocessing capacity concentration in real estate related exposures remains limited. To move to the next stage of pose key risks to Cambodia’s macro-financial participation in global value chains (GVCs), the stability. Intensified supervision is called for as policy mix will need to evolve. First, attention pandemic measures such as loan restructuring should be paid to contract enforcement, and forbearance are phased out. This could protecting intellectual property rights, and include enhanced focus on stress testing strengthening national certification and testing of individual institutions, systematic onsite capacity to ensure compliance with international inspections, further aligning the regulatory standards. Second, lowering barriers to trade and framework with international standards, and improving connectivity to markets would expand further assessing the quality of loan portfolios, the size of the market for Cambodia’s products among others. In parallel, the authorities should and improve access to the inputs needed for continue with efforts to prepare legislation production. Third, continue improving the on deposit insurance and bank resolution. To education and skills of Cambodia’s labor force by prepare for increasing levels of non-performing investing in human capital. Fourth, harness the loans (NPLs), the authorities should ensure that digital economy to support firms to integrate resolution options are ready to be deployed as into GVCs through digital platforms as well as by needed. Similarly, the country’s insolvency regime connecting value chain participants. ©Shutterstock/Nido Huebl 4 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 1 Recent Economic Developments and Outlook Figure ES.1 Cambodia’s recent developments at a glance Economic growth continued to solidify… …thanks to an accelerated recovery of services… Real growth (percent) International arrivals (million) 10.0 0.7 8.0 6.3 0.6 6.1 6.0 5.5 0.5 4.0 0.4 2.0 0.3 0.0 0.2 -2.0 0.1 -4.0 0.0 2022e 2023p 2024p 2025p Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 GDP growth Historical average (5 years) Arrivals Historical average (5 years) …supported by easing inflation… …helping offset the decline in goods exports… (y/y percent change) Goods (excluding gold) exports (YTD, y/y percent change) 8.0 40 7.0 30 6.0 20 5.0 4.0 10 3.0 0 2.0 -10 1.0 0.0 -20 Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17 Apr-18 Nov-18 Jun-19 Jan-20 Aug-20 Mar-21 Oct-21 May-22 Dec-22 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Headline inflation (y/y) Exports Historical average (5 years) Jan-23 Historical average (10 years) …broad money (M2) growth decelerated… …domestic revenue growth fully recovered. Broad money liabilities (y/y percent change) Central government domestic revenue (y/y percent change) 50 30 40 20 30 10 20 0 10 -10 0 -20 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Domestic revenue M2 y/y, percent change Historical average (5 years) Historical average (5 years) Sources: Cambodian authorities; World Bank staff estimates and projections. Note: e = estimates; p = projection; YTD = year to date; y/y = year on year. CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 5 CHAPTER 1 Recent Economic Developments and Outlook Recent developments economic growth in EAP countries: COVID-19 containment measures, external conditions, and the capacity of the government to provide Pent-up consumer demand support. Cambodia has been able to avail itself boosted the services sector of all of them. Cambodia’s post-pandemic economic recovery But now there are signs of weakening external is well underway. Owing to the success in demand as global growth is decelerating rolling out its vaccination program, Cambodia sharply this year.2 This is caused by shifted to “living with COVID-19” in late 2021. overlapping shocks that include synchronous As a result, the country’s economic recovery policy tightening aimed at containing very high solidified in 2022, with real growth accelerating inflation, worsening financial conditions, and to 5.2 percent (figure 1). Initially led by continued disruptions from the Russia’s invasion strong performance of the export-oriented of Ukraine. Small states, including Cambodia, manufacturing industry, the economic recovery are especially vulnerable to such shocks because is now increasingly underpinned by a strong of their reliance on external trade and financing, rebound in the services sector, especially the limited economic diversification, elevated debt, trade, travel, and hospitality industries, driven and susceptibility to natural disasters (see box 1 by pent-up consumer demand and the return on global economic developments and outlook). of foreign tourists. Domestic consumption is also being boosted by the easing of inflation as energy and food prices stabilized. Figure 1 Economic recovery solidified Contribution to real GDP growth (percent) Similarly, in most of the developing East Asia and Pacific (EAP) region, economic activity 10 7.5 7.1 has recovered from the recent COVID-19 and 7.0 6.9 7.0 5.5 6.1 6.3 5.2 oil price shocks, with goods exports and private 5 3.0 consumption leading the way.1 A regional comparison shows that even if Cambodia is able 0 to solidify its economic recovery from the recent shocks, it has been lagging behind Vietnam -3.1 -5 and China. By the end of 2022, Cambodia and 2022e 2023p 2024p 2025p 2015 2016 2017 2018 2019 2020 2021 many countries in the East Asia and Pacific region, namely Indonesia, Lao PDR, Malaysia, Mongolia, the Philippines, Nauru, Kiribati, and Agriculture Taxes less subsidies Papua New Guinea, exceeded pre-pandemic Services-others Industry-construction Industry-others Services-hotels levels of output, while China and Vietnam did and restaurants Industry-garment so in 2020. In contrast, output remains below and footwear GDP growth pre-pandemic levels in several Pacific Island countries as well as in Myanmar, Thailand, and Sources: Cambodian authorities and Timor-Leste. Three broad factors influenced World Bank staff projections. Note: e = estimates; p = projection. 1 World Bank 2023a. 2 World Bank 2023b. 6 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 1 Recent Economic Developments and Outlook Cambodia’s goods exports FIGURE 2 Goods exports contracted started contracting in Contribution to export growth (percentage point) recent months 40 30 Recent high-frequency indicators suggest 20 weakening external demand. Caused largely by the decline in exports to the U.S. and EU 10 markets, total goods exports contracted 14.2 0 percent year on year (y/y) during the first -10 two months of 2023 (figure 2), compared to an average growth rate of 6.7 percent -20 in 2019. Cambodia’s small, open economy -30 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Jan-23 Feb-23 remains dependent on global demand. Elevated commodity prices and financial tightening in advanced economies continue to affect the Others Clothing Shoes Bags EAP region’s economies through both real and Bicycle Woods financial channels. Electricals Agricultural products Textiles Total As depicted in figure 2, deterioration of Source: Cambodian authorities. garment, travel goods, and footwear exports was particularly pronounced, indicating a of 2023, garments, travel goods, and footwear relatively elastic demand for these products contributed the largest, accounting for 11.8 with respect to incomes of Cambodia’s main percentage points, 2.7 percentage points, and 2.4 export markets, especially the United States percentage points, respectively. The contribution and European Union. Of the 14.5 percent decline of “other goods exports,” however, expanded, in total exports during the first two months accounting for 6.7 percentage points. ©Shutterstock/Nido Huebl CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 7 CHAPTER 1 Recent Economic Developments and Outlook Box 1 Global economic developments and outlook Global growth is expected to slow markedly this In the East Asia and Pacific (EAP) region, growth is year, weighed down by significant synchronous expected to pick up this year. This primarily reflects policy tightening aimed at containing high inflation stronger growth in China, where an earlier-than- and worsening financial conditions.a While inflation expected economic reopening and a rapid decline shows signs of peaking in many advanced and in COVID-19 cases earlier this year are supporting emerging market and developing economies a recovery in activity following very weak growth (EMDEs), it remains high overall (figure B1.1). in 2022. In the first months of the year, retail Persistent high inflation led some central banks, sales recovered while investment remained solid, notably the U. S. Federal Reserve and the European supported by infrastructure spending. By contrast, Central Bank, to continue hiking policy rates in industrial production was more subdued, in part early 2023. While monetary policy tightening cycles reflecting weak external demand. In the EAP, appear to be near their peak in many countries, excluding China, growth is expected to moderate the drag from existing interest rate hikes is set to in 2023 following very strong growth in 2022 deepen in the near term given the lags between associated with economic reopening. changes in monetary policy and its economic impacts. Recent turmoil in the U.S. and European Risks to the global outlook remain tilted to the banking sectors has also contributed to tighter downside. Tight global financial conditions amid financial conditions and added to uncertainty. high debt could trigger financial stress, particularly in less creditworthy countries. Monetary policy could Global trade is expected to slow this year alongside remain tight for longer than expected if inflation weakening global activity. Around the turn of pressures persist. In the event of weaker growth, the year, global goods trade contracted as weak limited fiscal space in many countries reduces the demand in advanced economies weighed on EMDE ability of governments to support activity. exports. However, the services trade outlook is more positive, with the recovery in global tourism The expected slowdown in global growth is expected to continue, supported by the China occurring amid a broad-based slowdown in global reopening. Normalization of shipping conditions and EMDE potential growth.b Absent reform, and weakened demand for goods contributed to potential growth in EMDEs is projected to continue the return of global supply chain pressures to pre- declining over the remainder of the 2020s (figure pandemic levels in early 2023. B1.2). A combination of the pandemic-induced shock and reverberations from the war in Ukraine Global food and energy prices have moderated from are expected to weigh on long-term growth, their peaks in 2022 but remain elevated, while including through adverse impacts on human capital metals prices have edged up owing to anticipated accumulation and investment. The EAP is expected stronger demand from China. Energy and food to experience the sharpest slowdown of all EMDE prices are expected to ease this year, weighed down regions, reflecting slower capital accumulation and by subdued global demand. In many countries, total factor productivity growth, including in China. easing commodity prices will help cool inflation in the near term, alongside weaker activity. Figure B1.1 Inflation Figure B1.2 Potential growth 10% 6% 8% 4% 6% 2% 4% 0% 2000-10 2011-21 2022-30 2000-10 2011-21 2022-30 2000-10 2011-21 2022-30 2% 0% Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-23 World AEs EMDEs Potential growth Actual growth EMDEs Global AEs 2000-2021 potential growth Sources: a. World Bank 2023a. b. Kose and Ohnsorge 2023; World Bank. 2023b. Note: This box was prepared by Samuel Christopher Hill, DECPG. 8 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 1 Recent Economic Developments and Outlook The decline in goods decreased to 17.1 percent in February 2023, after peaking at 20.6 percent in July 2022. In exports to the U.S. and EU contrast, the contributions of the Chinese and markets accounted for 95 ASEAN markets to Cambodia’s goods exports growth remained positive but insignificant, percent of total decline accounting for only 0.7 percentage points and 0.1 percentage points, respectively. Falling demand from the United States and the European Union caused by the economic Export product diversification is slowly slowdowns in the two main export markets, emerging. Despite continued dependency on was the main reason for the decline in garment exports, non-garment exports are Cambodia’s goods exports. The contribution of increasing. The share of garment (and textile) the U.S. market to the country’s goods exports product exports declined to 45.2 percent in growth plummeted from 35 percentage points 2022, down from 54.4 percent in 2019 (figure in April 2022 to negative 7.6 percentage points 4). The share of goods exports classified under in February 2023, while that of the EU market “others” rose to 21.8 percent in 2022, up from shrank from 11.9 percentage points to negative 9.4 percent in 2019. During the same period, 3.1 percentage points during the same period the share of bicycle exports rose to 4.4 percent, (figure 3). Given the U.S. and the EU markets up from 3.7 percent. However, the share of are the first- and second-largest export electronic, electrical, and vehicle parts in total markets for Cambodia, the declines in the two exports remained relatively small and unchanged markets combined accounted for 95.4 percent at around 3.5 percent, possibly indicating that of total decline in exports during the first two the country’s electronic and electrical sector months of 2023. has yet to achieve competitive advantages. There have been continued challenges in Cambodia’s merchandize exports to the United addressing the high costs (and unreliable supply) States dipped by 20.2 percent during the first of energy and logistics, and an overall lack of two months of 2023. Consequently, the share labor skills, which likely constrain the country’s of the U.S. market shrank to 40.9 percent of participation in electronic and electrical value total goods exports in February 2023, after chains. Similarly, the shares of travel goods peaking at 48.3 percent in June 2022. Similarly, and footwear products remained relatively Cambodia’s exports to the EU market dipped unchanged at 8.7 percent and 8.0 percent, by 17.7 percent. The share of the EU market respectively. Figure 3 Contribution to goods export Figure 4 Goods export diversification growth (percentage point) continued (percentage share) 80 100% 60 80% 40 60% 20 0 40% -20 54.4 53.1 47.2 45.2 20% -40 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Jan-23 Feb-23 0% 2019 2020 2021 2022 ASEAN EU Others Wood and agricultural products USA China Bicycles Electrical, electronic and vehicle parts Japan UK Footwear Travel goods RoW Total Source: Cambodian authorities. Source: Cambodian authorities. Note: RoW = rest of the world. CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 9 CHAPTER 1 Recent Economic Developments and Outlook The total investment total investment, of which the logistics and hospitality sectors received US$1.3 billion and amount of approved US$129 million, respectively. Investment in the FDI projects slowed energy sector (hydropower plant) accounted for US$389.4 million. Nevertheless, export During the first two months of 2023, diversification and value chain improvements approved FDI project value classified as remained a challenge due to the high costs of Qualified Investment Project (QIP) declined electricity (and supply unreliability) and logistics, to US$156 million, contracting 92.3 percent and skills gaps, dampening the country’s external (figure 5). Despite the decline in garment, travel competitiveness in high value-added products. goods, and footwear (GTF) exports, foreign investor appetite to finance the GTF industry FDI inflows into Cambodia grew rapidly over continued. Of the total US$156 million, US$83 the past decade and have remained relatively million (60 percent) went to the garment resilient even through the COVID-19 period. FDI industry, while the remaining US$73 million (40 inflows to Cambodia accounted for 12.9 percent percent) financed the travel goods, footwear, of GDP in 2021, the 11th-largest FDI recipient in and packaging industries. Meanwhile, the new the world in relative (GDP) terms and second in Investment Law, adopted in late 2021, has not ASEAN after Singapore (26.5 percent of GDP). been implemented due to a delay in introducing Most of Cambodia’s FDI comes from China and its implementation sub-decree, which is the EAP, but it is still more diversified than most expected to be ready this year. other countries. As of 2022, FDI stock originated from China (including Hong Kong SAR, China); This year’s decline follows a significant Korea; Singapore; Japan; and Taiwan, China, increase in approved FDI project value last the top five FDI origins, accounting for US$17.2 year. The total investment amount reached billion, US$5.3 billion, US$2.9 billion, US$2.7 US$1.15 billion in 2022 or a 75.4 percent billion, and US$2.6 billion, respectively. The FDI increase. In addition, the approved projects were stock from the top five combined accounted diversified well beyond garment, which received for more than two-thirds of the total FDI stock only US$267 million or 22.8 percent of total of US$44.5 billion. The inflows, however, were investment (figure 6). Approved FDI project less successful in contributing to economic investment value in the non-garment industries diversification or local value-adding (for more reached US$803 million, or 68.6 percent of discussion on FDI, see box 2). Figure 5 Investment appetite eased Figure 6 Approved FDI-financed projects by Approved QIP value (US$ billion, sector (US$ billion, 2022) 6-month moving average, fixed asset) Agriculture and food 1.00 Tourism, processing, 0.060, 5.1% 0.008, 0.7% 0.80 Mining, 0.004, Garment, 0.3% 0.267, 22.8% 0.60 Wholesale and retail, 0.40 0.029, 2.5% 0.20 0.00 Non-garment industries, Jun-18 Oct-18 Feb-19 Jun-19 Oct-19 Feb-20 Jun-20 Oct-20 Feb-21 Jun-21 Oct-21 Feb-22 Jun-22 Oct-22 Feb-23 0.804, 68.6% Domestic (6mma) FDI (6mma) Source: Cambodian authorities. Source: Cambodian authorities. Note: QIP = Qualified investment project. 10 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 1 Recent Economic Developments and Outlook Box 2 What more can be done to improve the contribution of FDI to the economy? Globally, the deteriorating economic environment FDI inflows to Cambodia grew rapidly over the past caused by overlapping crises (the COVID-19 decade. FDI inflows doubled in 2019, compared to pandemic, Russia’s invasion of Ukraine, and sharp 2015’s (figure B2.2) -- and have remained relatively monetary tightening to offset global inflation) has resilient even through the COVID-19 period. The created unprecedented volatility and uncertainty sources of Cambodia’s FDI are more diversified than for FDI inflows to developing countries. Underlying most other countries’, although they come almost the volatility of FDI flows have been gradual but entirely from the EAP region -- China (including Hong persistent shifts and pivots in the organizations of Kong, SAR, China); the Republic of Korea; Singapore; multinational corporations’ international production Japan; and Taiwan, China are the top five FDI and the associated FDI location decisions. The origins, accounting for 69 percent of total FDI stock COVID-19 pandemic interrupted the rising share (US$44 billion) in 2022. FDI inflows to Cambodia of FDI to developing countries but triggered an accounted for 12.9 percent of GDP in 2021, the 11th- increase in services FDI and the changing geographic largest FDI recipient in the world in relative (GDP) composition of FDI, such as a rise in near-shoring terms and second in ASEAN after Singapore (26.5 and diversification of supply chains, has emerged. percent of GDP). FDI inflows to Cambodia have been Investment relocating from China is a key contributor increasingly concentrated in the accommodation, to supply chain reconfiguration (figure B2.1). construction, real estate, and financial sectors. The inflows, however, were less successful in contributing to economic diversification or local value-adding. Low labor cost and tax incentives were the two main attractive factors.a Figure B2.1 Rise in near-shoring and Figure B2.2 Cambodia’s FDI by sector supply chain diversification (US$ million) Region with largest Region with largest 1,000 invesment reduction invesment increase 900 East Asia East Asia and and Pacific 800 Pacific 36% 35% 700 600 500 South Asia 5% South Asia 13% 400 300 European and 200 Central Asia European 20% and Central 100 Asia 19% 0 Latin America 10Q1 10Q4 11Q3 12Q2 13Q1 13Q4 14Q3 15Q2 16Q1 16Q4 17Q3 18Q2 19Q1 19Q4 20Q3 21Q2 22Q1 22Q4 and the Caribean 24% North America 18% North America 4% Latin America Manufacturing ACR Sub-Saharan and the Africa 7% Caribean 4% Financial activities Others Middle and Sub-Saharan North Africa 4% Africa 4% Middle and Source: Cambodian authorities. North Africa 6% Note: ACR = Accommodation, construction, and real estate. CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 11 CHAPTER 1 Recent Economic Developments and Outlook Box 2 What more can be done to improve the contribution of FDI to the economy? (continued) Investment policies to attract, bolster, and constraints are associated with the lower connect FDI are summarized in table B2.1. While productivity performance of Cambodian firms. In the Cambodia has done relatively well in attracting 2022 Global Competitiveness Index Cambodia ranks FDI, it has been less successful in connecting FDI lower than peers in several business environment with domestic investment. Further improving the measures. Immediately removing restrictive policy business environment and business regulations measures introduced during the pandemic, that is, focusing on business licensing and business permits reintroduction and expansion of Customs’ “green is necessary. Multinational corporations regard lane” is crucial to facilitate trade. Although investors improvement of the business environment as the note a sharp improvement in the quality and supply most impactful strategy to increase local sourcing.b of infrastructure in recent years, transport and Empirical evidence confirms business environment electricity still figure among the top 10 constraints. Table B2.1 Investment Policies 1. ATTRACT 2. BOLSTER 3. CONNECT Goal: Attract productive FDI, Goal: Bolster existing Goal: Connect FDI to local firms tasks, segments in global/ FDI for re-investment of and deepen Global Value Chain regional value chains. Policy: corporate earnings, increase integration. Policy: Establish an Open entry (remove barriers in investment, and expansion online portal and digital app and protectionism). Target of operations. Policy: to offer basic matchmaking investment promotion. Ensure Strengthen investment services. Establish a supplier transparent and streamlined protection (shareholders’ development program, SME implementation of the new Law rights), conflict resolution. promotion, develop human on Investment, its sub-decree. Introduce commercial court, capital, and upgrade skills. Streamline business licensing pro-active investment retention Simplify VAT refunds. procedures. mechanisms, and targeted aftercare programs. Source: World Bank Global Investment Competitiveness 2021-2022 Survey data. Note: This box was prepared by Peter Kusek, Gerlin May U. Catangui, and Sodeth Ly. a. 2018 FDI survey. b. 2018 FDI survey. SME = small and medium-sized enterprise; VAT = value-added tax. Construction permits up from zero in 2022. The number of approved square meters of construction permits also rose, rose for the first time reaching 1.2 million, or a 278 percent increase. since 2019 Despite improvements in construction permit numbers, property development activity likely For the first time since 2019, approved continues to suffer from excess supply. Several years before the pandemic hit, Cambodia’s urban construction permit value increased during the centers such as the capital city of Phnom Penh, first two months of 2023. Possibly reflecting the tourist attraction site of Siem Reap, the renewed investor appetite to invest in the seaside town of Sihanoukville, and the border construction and real estate sector, approved towns of Poi Pet and Bavet, experienced a rapid construction permit value rose, reaching US$802 construction boom. Given the country’s relatively million, or a 484 percent increase during the small domestic market, the boom created first two months of 2023 (figure 7). Of this, excess supply. In addition, the financial sector approved construction permits for projects in has been partly behind the recent construction Sihanoukville province, which experienced the boom. In this regard, it is increasingly important most rapid construction boom during the pre- to safeguard financial stability (see the policy pandemic period, accounted for US$160 million, options section). 12 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 1 Recent Economic Developments and Outlook Despite rising construction permit value during during the first two months of 2023, up from the first two months of 2023, performance 10.6 percent (3,000) during the same period in of construction material imports remained 2022. Thanks partly to a surge in international mixed. While steel imports mainly used for the arrivals to Thailand, land arrivals skyrocketed, construction industry accelerated, growing at reaching 523,000 during the first two months 18.5 percent in volume terms during the first of 2023, up from 42,000 during the same two months of 2023 (figure 8), imports of period in 2022. construction equipment and cement contracted at 7.1 percent and 38.3 percent, respectively. The number of domestic tourists also surged. During the Khmer New Year in April 2023, The recovery of tourism there were about 13 million domestic tourists, activity is picking up speed which exceeded pre-pandemic levels, of which 2.1 million visited Siem Reap. Revenue from Underpinned by a complete removal of COVID- Angkor temple complex entrance fees increased 19-related mobility restrictions, international to US$7.38 million during the first two months arrivals quickly accelerated, reaching of 2023, up from US$478,000 during the same 837,000 during the first two months of 2023, period in 2022. approaching pre-COVID-19 levels (figure 9). Air arrivals were rising, accounting for 37.5 After China’s reopening, Chinese tourist percent of total arrivals in 2023, up from 30.1 arrivals started to recover. Arrivals from percent in 2022. Reflecting a rising number of China increased quickly in 2023 as their share foreign tourists visiting Siem Reap, Cambodia’s rose to 9.5 percent of total arrivals during the largest tourist attraction site and where the first two months of 2023, up from 5.8 percent Angkor Archeological Park is located, the share during the same period in 2022. Chinese of international arrivals at the Siem Reap tourists ranked third, after Vietnamese (28 international airport also increased, reaching percent) and Thai (26 percent), who ranked 30.4 percent (93,000) of total air arrivals first and second, respectively. Figure 7 Approved construction permit Figure 8 Volume of construction value improved (US$ million) material imports remained subdued (y/y, percent change) 3,500 800 700 200 3,000 600 150 2,500 500 400 100 2,000 300 50 1,500 200 100 0 1,000 0 500 -50 -100 0 -200 -100 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 o/w value for SHV Approved value Total Steel Approved value (y/y) Cement Construction materials Source: Cambodian authorities. Source: Cambodian authorities. Note: RHS = right-hand scale; SHV = Sihanoukville; Note: y/y = year on year. YTD = year to date; y/y = year on year. CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 13 CHAPTER 1 Recent Economic Developments and Outlook Box 3 Linking the “fourth economic pole” to the international gateways Factors attributable to Cambodia’s high transport then 4 (blue line) to the international gateway of costs include inadequate and inefficient transport Sihanoukville port, travelling as far as about 500 networks. The high transport costs render the kilometers and taking approximately nine hours country’s agricultural export prices less competitive, (figure B3.1). However, with the new road corridor despite its competitive farmgate prices. As a result, (green line), which includes National Roads 48, 55, farmers mostly sell their agricultural products to 5, 6, 56, 57, 66, and 68 together with National traders from neighboring countries, where they are Road 10 (currently under construction) linking with reexported. While the country produces more than Koh Kong province’s Botumsakor deep seaport, the 13 million metric tons of cassava root for export, transport distance (and time) is estimated to be cut worth US$728 million a year, its direct export by about a quarter. Cambodia’s “fourth economic to China is only US$16.0 million (2.2 percent).a pole,” consisting of four main northwestern crop- Similarly, the country’s direct (milled) rice export producing provinces, Pursat, Battambang, Banteay value accounted for about 20 percent of total rice Meanchey, and Pailin, together with six adjacent exports. Cambodia has therefore invested heavily provinces, produces the majority of the country’s in physical infrastructure developments, especially agricultural products, namely rice, cassava, longan, roads and ports, and more recently logistics hubs mango, cashew nut, and more (table B3.1).b The new to improve connectivity within the country and road corridor will provide better access to the main with regional and global markets. Newly built agricultural producing provinces and agroprocessing road networks play a crucial role in Cambodia’s facilities in the northwestern part, potentially economic development as they connect people, boosting economic activity there by facilitating goods, and services domestically and regionally, the movement of agricultural products and people, while facilitating trade, promoting tourism, boosting enabling businesses, especially agroprocessing firms, investment, and contributing to job creation and to become more competitive. poverty reduction. However, it will take time to reap the full potential Currently, direct exports of agricultural products, for benefits. First, additional resources and efforts example, 88 percent of milled rice and 78 percent from both the public sector and private sector of mango, are trucked from the northwestern will be needed to “reconfigure” agricultural supply province of Battambang, the center of Cambodia’s chains, which will require efforts to encourage “fourth economic pole,” via National Roads 5 and the private sector to relocate (and invest more Figure B 3.1 The fourth economic pole Table B3.1 The main northwestern crop-producing provinces Rice Cassava Longan Province '000MT (%) '000MT (%) MT (%) Battambang 1,514 12.4 3,276 24.8 7,457 5.7 BMeanchey 1,007 8.2 1,534 11.6 82,803 63.0 Pursat 702 5.8 490 3.7 355 0.3 Siem Reap 574 4.7 530 4.0 - 0.0 OMeanchey 271 2.2 1,516 11.5 200 0.2 KThom 976 8.0 1,068 8.1 75 0.1 Kampot 537 4.4 7 0.1 364 0.3 Koh Kong 27 0.2 0 0.0 30 0.0 PVihear 290 2.4 606 4.6 52 0.0 Source: Authors’ estimates. Pailin 25 0.2 649 4.9 26,780 20.4 Subtotal 5,923 48.5 9,676 73.1 118,116 89.8 Total production 12,207 100.0 13,233 100.0 131,498 100.0 Sources: Ministry of Agriculture, Forestry, and Fisheries 2022. Note: MT = metric ton 14 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 1 Recent Economic Developments and Outlook Box 3 Linking the “fourth economic pole” to the international gateways (continued) in) agroprocessing facilities along (or closer to) Second, and perhaps more importantly, promoting the new road corridor. This could be fostered and transport and trade facilitation to enhance supply strengthened by the provision of resources through chain reliability and service quality is key for existing agricultural and agroprocessing financing a successful reconfiguration. This will improve mechanisms, technical and fiscal support, and Cambodia’s transport and logistics performance, as access to energy supply. In addition, rural and predictability is not just a matter of time and cost, provincial road networks connecting the new but also a component of shipment quality. Several road corridor will need to be built and upgraded causes of delays or unreliability in Cambodia’s to expand access to the agroprocessing facilities logistics sector, such as the quality of service or for agricultural product storage, processing, and the cost and speed of clearance processes, can be exports. Most rural and provincial road networks addressed through interventions by Cambodian on which most of the agricultural production authorities. It is therefore crucial to reduce the depends for input supply and market access have cost of “doing business,” which includes “unofficial deteriorated, been disconnected, or are unpaved, payments” to get documents out in time for as reflected by a fall in Cambodia’s transport shipment, to obtain stamps before the office closes, infrastructure quality index from 3.1 (2010) to 2.1 and to move trucks in transit to or from the ports (2018) out of a total score of 7.0.c and borders. Note: This box was prepared by Sodeth Ly and Runsinarith Phim. a. 2020–25 National Cassava Policy; https://www.undp.org/cambodia/publications/national-cassava-policy. According to the authorities, “Economic poles” refers to geographic areas of concentrated economic activity. Currently, b.  Cambodia has five economic poles, which include Phnom Penh, Sihanoukville, Siem Reap, the northwestern region, and the northeastern region. c. See https://www.theglobaleconomy.com/Cambodia/roads_quality/. Agricultural GDP is of total rice cultivated area, rice harvested area shrank by 5.5 percent to 3.3 million hectares. estimated to have Rice harvested areas for both rainy and dry marginally increased season rice declined by 6.6 percent and 1.2 percent, respectively. Average rice yield, however, The agriculture sector continued to play marginally increased to 3.5 metric ton per an important role in the economy. While hectare. Rainy season rice production accounted the share of agriculture in GDP declined to for 75 percent, while dry season rice production 22 percent in 2022, thanks to the country’s made up the remaining 25 percent. structural transformation, the sector continued to provide more than a third (35.7 percent) of Production of non-rice crops was mixed. In 2022, total employment. In addition, agricultural GDP rubber production reached 382,000 metric tons, (at constant prices), which is real growth of or a 3.8 percent increase, as efforts to boost the agriculture, forestry and fisheries sector is smallholder rubber production paid off. Production estimated by the authorities to have increased of cassava, the second priority crop after rice, by 1.0 percent in 2022.3 Nevertheless, rice however, declined to 14.2 million metric tons or production declined last year. Caused mainly 3.2 percent, despite the introduction of the 2020– by less favorable weather conditions affecting 25 National Cassava Policy in 2020.4 Cashew nut 22 provinces, total rice production during the production rose, reaching 508,283 metric tons, 2022–23 production year dropped to 11.6 million or a 7.5 percent increase. Of the total 1.5 million metric tons, or a 4.7 percent decline. Hit by hectares of non-rice crop cultivated area, 2.3 draughts and floods, which damaged 3.9 percent percent was affected by drought. 3 Ministry of Agriculture, Forestry and Fisheries 2023. 4 https://www.undp.org/sites/g/files/zskgke326/files/migration/kh/UNDPKH_ENG_Cassava-policy.pdf. CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 15 CHAPTER 1 Recent Economic Developments and Outlook Agricultural export commodity exports. Price volatility, however, continued to affect agricultural commodity performance improved export performance, while less favorable weather conditions affected the yields and quality of According to the Cambodia Rice Federation, some crops. this year’s prices of paddy and other agricultural crops increased by about Caused by the high processing costs, farmers 10 percent to 20 percent, underpinning mostly sell their agricultural products to Cambodia’s agricultural commodity exports. traders from neighboring countries, where The fragrant rice and soft white rice prices they are reexported. Total processed and raw were US$780 and US$520 per metric ton, agricultural product exports reached US$790.5 respectively. In value terms, exports of milled million,6 accounting for 29.0 percent of total rice expanded, rising to US$72.6 million, or a 4.5 goods (excluding gold) exports during the percent increase during the first two months first two months of 2023, of which processed of 2023. As shipping costs moderated and the agricultural product exports accounted for less trade safeguard measures imposed by the EU than a quarter (23.4 percent). This reflects a on Cambodian rice ended in January 2022,5 large untapped potential that Cambodia can rice exports to the EU market improved. In gain from an expansion of its agroprocessing addition to traditional agricultural commodities industry (figure 10), which remains weak due to such as rice, cassava, and rubber, fresh mango the country’s high costs of energy (and supply and banana exports, especially to the Chinese unreliability), transport, and doing business. The market, have emerged. Fresh banana exports milled rice export revenue of US$72.6 million quickly rose to US$182 million in 2022, up accounted for only 28 percent of total (milled from US$49.3 million in 2019. China’s opening and paddy) rice exports of US$258.5 million will potentially boost Cambodia’s agricultural during the first two months of 2023. Figure 9 International arrivals and Angkor Figure 10 Agricultural exports – unrealized revenue quickly recovered (million) agroprocessing potential (US$ million) 0.8 14 790.5 0.7 12 0.6 10 0.5 0.4 8 0.3 6 258.5 189.1 0.2 4 0.1 72.6 2 0 Total (Jan-Feb 2023) o/w rice (Jan-Feb 2023) -0.1 0 Total agricultural product exports Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-23 Processed agricultural product exports Source: Cambodian authorities. Arrivals (million) Angkor revenue (US$ million, RHS) Source: Cambodian authorities. Note: RHS = Right-hand scale. 5 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; https://trade.ec.europa.eu/doclib/press/index.cfm?id=1970. 6 Ministry of Agriculture, Forestry and Fisheries. 2023. “Annual Report for 2022-23.” Ministry of Agriculture, Forestry and Fisheries, Phnom Penh. 16 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 1 Recent Economic Developments and Outlook Consumption strengthened, 2.2 percent y/y in February 2023 (figure 11). Inflation peaked at 7.8 percent, a 13-year high driven by pent-up in June 2022, caused largely by rapidly rising consumer demand prices of food and petroleum products resulting from the global food and oil price shock. The Pent-up demand, underpinned by a complete easing of food prices, particularly of meat removal of COVID-19-related mobility and fresh fruits and vegetables, brought down restrictions and the decline in inflationary inflation significantly, given the fact that the pressures, drove a recovery of domestic food component (subindex) captures a 43 consumption, which accounts for about percent weight of the inflation basket. The three-quarters of GDP. In addition, the return contribution of the food subindex to inflation of international arrivals has further fueled declined to 1.7 percentage points in February consumption (and investment). Imports of 2023, down from the 3.6 percentage point peak consumer and durable goods continued to in June 2022. During the same period, reflecting recover in 2023. During the first two months stabilized oil prices, especially gasoline and of 2023, quantity imports of consumer goods diesel prices, the contribution of the transport such as gasoline, alcohol, cooking oil, and sugar subindex shrank to 0.01 percentage points, down accelerated, growing at 28.1 percent, 16.7 from the 1.8 percentage point peak. Cambodia’s percent, 79.7 percent, and 49.6 percent y/y, CPI, excluding food, decelerated to 0.5 percent respectively. Similarly, value imports of durable y/y in February 2023, down from 4.3 percent in goods such as passenger cars and buses rose to June 2022. 6.63 percent and 127.1 percent y/y, respectively. As a result, the services sector, especially With the marginal depreciation of the local wholesale, retail, travel, and tourism, accelerated. currency vis-à-vis the U.S. dollar exchange rate, the computed inflation rate in U.S. dollar Inflation has significantly terms was 1.2 percent in February 2023,7 which is marginally below the current inflation eased, returning to rate of 2.2 percent y/y, in local currency terms. pre-shock levels This has protected the value and purchasing power of riel-denominated assets (those who Thanks to the easing of food and oil prices, earn income in riel) — one of the main objectives Cambodia’s CPI significantly eased, reaching of pegging the riel to the dollar. Figure 11 Inflation eased after surging Figure 12 Inflation in Cambodia’s main Contribution to 12-month inflation trading partners (y/y percent change) (percentage points) 10 10 8 8 6 6 4 4 2 2 0 0 -2 -2 -4 -4 Jan-13 Sep-13 May-14 Jan-15 Sep-15 May-16 Jan-17 Sep-17 May-18 Jan-19 Sep-19 May-20 Jan-21 Sep-21 May-22 Jan-23 Jan-13 Sep-13 May-14 Jan-15 Sep-15 May-16 Jan-17 Sep-17 May-18 Jan-19 Sep-19 May-20 Jan-21 Sep-21 May-22 Jan-23 United States Cambodia Others Food sub-index Vietnam Thailand Transport sub-index Sources: Haver Analytics. Housing and utilities sub-index Note: y/y = year on year. Headline inflation (y/y) Source: Cambodian authorities. 7 Inflation in U.S. terms is defined as the ratio of the changes of CPI indexes to the changes of the riel vs. U.S. dollar exchange rate indexes. The riel vis-à-vis the U.S. dollar exchange rate is first indexed, using the same base year as that of CPI. If the riel vis-à-vis the U.S. dollar exchange rate indexes are unchanged, the computed inflation in U.S. dollar terms is equal to inflation in local currency terms. As the local currency depreciates against the U.S. dollar, the index of the riel vis-à-vis the U.S. dollar exchange rate increases, and the ratio of the changes of CPI indexes to changes of the exchange rate indexes decrease. Inflation in U.S. dollar terms is, in this case, lower than that in local currency terms. CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 17 CHAPTER 1 Recent Economic Developments and Outlook The current account estimated to have reached about US$4.0 billion during 2020–22, and international reserves. balance improved as the oil Continued FDI inflows and concessional financing price shock eased largely cover external financing needs (see more discussions on concessional financing–debt Despite weakening goods export performance, disbursement under the fiscal section, below). the current account balance is improving as While remaining broadly stable, hovering the oil price shock moderates. With a broad- around 4,100 riels per U.S. dollar, the based improvement in economic activity, exchange rate appreciated against currencies including the rebound in the travel and tourism of other trading partners. The riel-U.S. dollar industry, net services, mainly tourism receipts, exchange rate was under increased pressures as and secondary income, mainly remittances, are the U.S. Federal Reserve hiked interest rates to expanding. In 2022, the trade deficit narrowed, keep rapid inflation from becoming entrenched thanks to strong merchandise exports, resulting (see the monetary section, below, for more in an improvement in the current account discussion on rising interest rates). The riel balance (figure 13). Cambodia’s goods export per U.S. dollar exchange rate has marginally growth accelerated last year, surpassing its pre- depreciated since May 2022 (figure 14). Pegging pandemic growth rate. Merchandise (excluding the riel to the strong dollar resulted in the gold) exports surged, growing at 22.5 percent appreciation of the riel against many regional y/y in 2022, up from 17.9 percent in 2021. country currencies, especially the Chinese During the same period, merchandise (excluding yuan, the Thai baht, and the Vietnamese dong. gold) imports growth eased to 11.9 percent The riel also appreciated against the euro, y/y, down from 25.9 percent. This led to an the Canadian dollar, and the British pound, improvement in the trade balance. As a result, making Cambodia’s exports less competitive. the current account deficit is estimated to have Likely reflecting interventions to stabilize narrowed to 26.3 percent of GDP in 2022. The the currency, Cambodia’s gross international current account deficit continued to be largely reserves declined to US$17.7 billion (about seven financed by capital inflows, especially FDI months of imports) in February 2023, down inflows which have been broadly stable and were from US$20.2 billion at the end of 2021. Figure 13 The current account improved Figure 14 The riel-U.S. dollar exchange rate (percent of GDP, excluding gold) was under pressure 20.0 4.5 4,160 660 10.0 4,140 640 4.0 0.0 4,120 620 -10.0 3.5 4,100 600 -20.0 4,080 3.0 580 -30.0 4,060 560 -40.0 4,040 2.5 -50.0 4,020 540 -60.0 2.0 4,000 520 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-23 Q1-17 Q3-17 Q1-18 Q3-18 Q1-19 Q3-19 Q1-20 Q3-20 Q1-21 Q3-21 Q1-22 Q3-22 FDI (RHS) CAB Riel per U.S. dollar Source: Cambodian authorities and World Bank staff estimates. Note: CAB = Current accounts balance; Riel per Yuan (RHS) RHS = Right-hand scale. Source: Cambodian authorities. Note: RHS = Right-hand scale. 18 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 1 Recent Economic Developments and Outlook Broad money growth to broad money growth, therefore, declined to negative 2.3 percentage points in February 2023, continued to decelerate down from 0.3 percentage points during the same period in 2022. The negative contribution Broad money growth further eased, likely of local currency in circulation to broad money reflecting global financial tightening. Due growth may also reflect interventions by the to Cambodia’s highly dollarized economy, the central bank in the foreign exchange market by country’s central bank, the National Bank injecting U.S. dollars. of Cambodia, has limited ability to influence money supply. However, to support the liquidity needed for economic recovery, the central bank Credit growth slowed maintained a reserve requirement ratio of 7 significantly, but percent for both riel and U.S. dollar deposits and borrowing. Driven by the easing of foreign concentration of credit in currency deposits, broad money (M2) growth real estate remained decelerated to 6.8 percent y/y in February 2023, down from 14.5 percent during the same While continuing to grow faster than nominal period in 2022 (figure 15). Of the 6.8 percent GDP growth, domestic credit decelerated M2 growth, the contributions of foreign currency sharply, growing at 14.8 percent y/y, a 13- deposits (and other deposits), transferrable year low in February 2023, well below the 22.0 deposits, and currency in circulation accounted percent growth rate recorded during the same for 5.7 percentage points, negative 2.3 period in 2022 (figure 16). Credit growth is percentage points, and negative 0.1 percentage increasingly constrained as banks face rising points, respectively, down from 11.7 percentage borrowing costs, thanks to sharp rises in global points, 3.2 percentage points, and 0.3 percentage interest rates.8 However, the credit-to-GDP points, respectively. As capital inflows decelerate, ratio increased further, reaching 183.7 percent injection of local currency into circulation is in 2022, up from 37.0 percent a decade ago. A increasingly constrained, given that the economy rapid expansion of domestic credit, growing at remains highly dollarized. As mentioned, the an average rate of about 30 percent a year that contribution of (local) currency in circulation Cambodia experienced almost a decade during Figure 15 Broad money growth decelerated Figure 16 Concentration of credit in real Contribution to broad money growth estate Contribution to domestic credit growth (percentage points) (percentage points) 50 36 31 40 26 30 21 20 16 11 10 6 0 1 -10 -4 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 May-17 Oct-17 Mar-18 Aug-18 Jan-19 Jun-19 Nov-19 Apr-20 Sep-20 Feb-21 Jul-21 Dec-21 May-22 Oct-22 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18 Sep-18 Apr-19 Nov-19 Jun-20 Jan-21 Aug-21 Mar-22 Oct-22 Foreign currency deposits (other deposits) Agriculture Manufacturing Transferable deposits Currency in circulation Hotels and restaurants CRM M2 y/y, percent change Wholesale and retail Other Source: Cambodian authorities. Total Source: Cambodian authorities. Note: CRM = construction, real estate, and mortgage. 8 Sharp rises in global interest rates could spark corporate distress and pose wider problems for many economies. https://www. imf.org/en/Blogs/Articles/2023/01/31/countries-should-act-now-to-limit-rising-risks-from-corporate-distress. CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 19 CHAPTER 1 Recent Economic Developments and Outlook the pre-COVID-19 period significantly slowed high private debt raises concerns about the drag in 2020 as the pandemic hit. However, credit on the economy if borrowers struggle to meet growth started to recover until the first quarter repayments. of 2022, when the Fed began to tighten its monetary policy to contain rising inflation in the United States.9 Pressure on domestic interest rates continued In 2023, possibly pointing to an increase in real estate speculation activity, rising Significant tightening of global financial and concentrating domestic credit in the conditions put upward pressure on domestic construction and real estate sector continued, interest rates. Cambodia’s interest rates rose despite rising borrowing costs and the easing quickly, following the Fed’s interest rate hikes, of construction activity after the construction bringing the federal funds rate to 4.75 percent to boom stalled amid the pandemic. In February 5 percent, up from 0.25 percent to 0.5 percent 2023, the combined contribution of construction, during March 2022–23. Rising funding costs for real estate, and mortgages to total credit growth banks and microfinance institutions in Cambodia rose to 43 percent, up from 37 percent during pushed up their operating costs, requiring them the same period in 2022. The contributions of to increase interest rates on loans. In February the agriculture, wholesale, retail, and hotel and 2023, the weighted average interest rates of restaurant sectors to credit growth, however, U.S. dollar-denominated and riel-denominated continued to ease to 1.3 percentage points, 1.3 term loans rose to 10.19 percent per year and percentage points, 2.3 percentage points, and 0.6 12.61 percent per year, respectively, up from 9.51 percentage points, respectively, during the first percent and 11.54 percent, respectively, during two months of 2023, down from 2.4 percentage the same period in 2022 (figure 17). Given lags points, 2.1 percentage points, 4.5 percentage in monetary policy transmission, the full impact points, and 0.8 percentage points, respectively, on activity of the current monetary policy during the same period in 2022. It remains to be tightening cycle has yet to fully materialize. seen how long the concentration of credit in the Going forward, the tightening cycle will likely construction and real estate sector will last. hurt investment and consumer spending. Private sector deposits eased significantly. Figure 17 Domestic interest rates continued Private sector deposit growth halved, expanding to increase (percent per year) at 7.5 percent y/y in February 2023, down from 15.8 percent during the same period in 2022. 6 16 The loan-to-deposit ratio, therefore, increased 14 further, reaching 141.5 percent in February 2023, 5 up from 132.5 percent during the same period in 12 2022. The easing of domestic deposits may have 4 10 compelled banks and microfinance institutions 3 8 to raise interest rates on deposits to attract depositors. Weighted average interest rates of 6 2 U.S. dollar-denominated and riel-denominated 4 term deposits rose to 5.54 percent per year and 1 2 6.7 percent per year, respectively, up from 3.94 percent and 5.54 percent, respectively, during 0 0 the same period in 2022. By the end of 2022, Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 May-17 Oct-17 Mar-18 Aug-18 Jan-19 Jun-19 Nov-19 Apr-20 Sep-20 Feb-21 Jul-21 Dec-21 May-22 Oct-22 the reported overall nonperforming loan ratios remained low at 3.2 percent and 2.6 percent for the banking and microfinance sectors, U.S. dollar deposits U.S. dollar loans (RHS) respectively.10 However, this may not fully reflect U.S. prime rate (RHS) declining asset quality, due to extensive loan Source: Cambodian authorities. restructuring allowed during the height of the Note: RHS = Right-hand scale. COVID-19 pandemic. In addition, Cambodia’s MDI = microfinance deposit-taking. institution. 9 Ferroni, Fisher, and Melosi 2023. 10 National Bank of Cambodia 2023. 20 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 1 Recent Economic Developments and Outlook The banking system Domestic revenue fully remained resilient recovered and continued to According to the National Bank of Cambodia, increase in 2022, the capital adequacy ratios were An across-the-board improvement in 22.5 percent and 21.2 percent for the banking domestic revenue collection continued in and microfinance sectors, respectively, well 2023. After fully recovering in 2022, domestic above the 15 percent prudential threshold. The revenue growth continued, thanks to further liquidity coverage ratios were 143 percent and improvements in revenue administration. Central 172.8 percent for the banking and microfinance government domestic revenue grew at 11.2 sectors, respectively, compared to the 100 percent in January 2023 (figure 19). Reflecting percent threshold (figure 18).11 The number of continued good performance of profit tax customer deposit accounts rose to 14.3 million collection, direct revenue contributed the most, and customer credit accounts to 3.7 million, up at 7.9 percentage points of the 11.2 percent from 12.7 million and 3.4 million, respectively. increase. The contributions of indirect revenue, Total assets of the banking, microfinance, and international trade revenue, and nontax revenue financial lease sectors accounted for 85.2 were a negative 0.6 percentage points, 1.1 percent, 14.2 percent, and 0.6 percent of total percentage points, and 2.8 percentage points, banking system assets, respectively. While respectively. The domestic revenue growth continuing to increase, the total assets of the rate of 11.2 percent in January 2023, however, banking system decelerated, expanding at 14.5 remained below the 20.6 percent revenue growth percent in 2022, down from 16 percent in 2021, in January 2019, consistent with the weaker reaching US$79.7 billion. post-COVID-19 economic expansion, compared to during the pre-COVID-19 period. Figure 18 Liquidity coverage ratios of banks and microfinance deposit-taking institutions Figure 19 Contributions to domestic revenue (percent) increase (percentage point) 250 30 20.6 200 20 17.5 12.3 11.2 150 10 100 100 100 100 80 90 0 50 -10 0 -20 -15.9 2018 2019 2020 2021 2022 Banks MDI Threshold -30 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Source: Cambodian authorities. Direct revenue Indirect revenue Note: MDI = Microfinance deposit-taking institution. International trade revenue Nontax revenue Domestic revenue Source: Cambodian authorities. 11 Liquidity coverage ratio is equal to the stock of eligible liquid assets divided by net case outflows within 30 days. See https:// www.nbc.gov.kh/download_files/legislation/prakas_eng/5759prakas-liquidity-coverage-ratio-english.pdf. CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 21 CHAPTER 1 Recent Economic Developments and Outlook Figure 20 Budget expenditure decelerated amid fiscal consolidation efforts Despite fiscal (percentage point) consolidation efforts, 40 budget expenditure 30 34.4 26.9 marginally increased 20 On the spending side, public expenditure is 10 expected to marginally increase, despite fiscal consolidation efforts. While both capital and 0 current expenditures are budgeted to increase -10 -8.8 -5.9 this year, public spending is shifting to support -21.6 -20 Cambodia’s economic recovery, while temporary -30 spending to boost financing the social sector, Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 especially the health sector, is withdrawn as COVID-19-related health expenditures have been Current Expenditures Capital Expenditures Total spending phased out. To that end, capital spending for the social sector is budgeted to decline from 0.91 Source: Cambodian authorities. percent of GDP in 2022 to 0.8 percent of GDP in 2023. The decline largely reflects a withdrawal of a spending boost for the health sector as In 2022, domestic revenue rose quickly. General COVID-19 infection has largely disappeared. government domestic revenue (excluding grants) Budgeted capital spending allocated to the reached 22.5 percent of GDP, representing a 21.9 Ministry of Health declined by almost a quarter, percent year-on-year increase in 2022. Domestic reaching only 0.44 percent of GDP in 2023, down revenue is collected mainly by two revenue from 0.62 percent of GDP in 2022.13 However, collecting agencies, the General Department as discussed in the Special Focus section of this of Taxation (47.0 percent of total) and the report, Cambodia has significantly expanded General Department of Customs and Excise public spending in social sectors over the past (44.7 percent of total). In 2022, direct revenue, decade, underscoring the urgent need to ensure consisting mainly of profit tax, rose quickly to efficient and effective spending in these sectors 6.1 percent of GDP, exceeding VAT collection to deliver public services and contribute to of 5.8 percent of GDP for the first time in the human capital formation. In the past decade, recent history of domestic revenue collection. improvements in the fiscal space as a result Strong efforts to improve collection continued, of a rapid expansion of domestic revenue with better tax administration, good governance, allowed the government to boost spending in the modernization, and the introduction of e-filing, healthcare and education sectors. In addition, e-payment, and taxpayer services, while Cambodia’s budget allocation boost was driven eliminating loopholes in the Law on Taxation partly by across-the-board salary increase for and harmonizing the legal framework to prevent its civil servants. Average monthly public sector fiscal evasion, transfer pricing abuses, and pay is now higher than private sector pay. double taxation. A taxpayers’ survey revealed Cambodia is currently among the countries that 88 percent of respondents agreed that with the highest share of its general government modernization of tax administration, especially revenues spent on the public wage bill (see the automation, helped improve tax payments.12 Special Focus section). 12 “Tax Bulletin - Quarter Four, 2022”; https://www.tax.gov.kh/en/tax-bulletin. 13 Annual Budgets for 2022 and 2023, Royal Government of Cambodia; https://mef.gov.kh/documents-category/law-and-regula- tion/budget/. 22 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 1 Recent Economic Developments and Outlook While public investment in the economic sector lower salaries when they were working than is budgeted to remain unchanged at 4.1 percent current civil servants. The increase in current of GDP in 2023, some economic ministries expenditure is also needed to finance hosting received relatively large capital spending the 32nd Southeast Asian Games and general boosts to support Cambodia’s economic election-related spending. recovery. Budgeted capital expenditure allocated to the Ministry of Rural Development and the The authorities continued to provide cash Ministry of Agriculture, Forestry and Fisheries transfers for poor and vulnerable households, rose to 0.62 percent of GDP and 0.29 percent of although the worst of the pandemic is now GDP, respectively, in 2023, up from 0.56 percent behind us. In this regard, the Cambodian of GDP and 0.16 percent of GDP, respectively, authorities have extended the COVID-19 cash in 2022. After accelerating during 2020–21 transfer program, with an additional budget to meet rising pandemic-related spending of roughly US$400 million. The program has demand, public expenditures decelerated. In benefited nearly 2.8 million people (17 percent January 2023, central government expenditures of the population) or 705,000 households. Of moderated, declining by 21.6 percent, thanks these, 110,000 are children under five years of largely to slow capital spending. Of the 21.6 age; 387,000 people over age 60; 60,000 people percent decline, capital expenditure accounted with disabilities and 2,000 people living with for a 26.0 percentage point decline, while HIV/AIDS. As of March 2023, it had disbursed current spending contributed an increase of 4.4 US$994 million since the launch in June 2020. percentage points (figure 20). In addition, the authorities have launched new cash transfer programs for households at risk The across-the-board due to inflationary pressures and severe flooding. In the first round of implementation, the cash public sector wage transfer under the inflationary pressure scheme increase is reintroduced disbursed US$9.12 million and benefited 261,000 households. The cash transfer program under The increase in budgeted current spending the flooding scheme was completed by March reflects the reintroduction of the across- 2023, disbursed US$11.6 million and benefited the-board public sector wage increase. The 99,000 households. The poverty rate measured public sector wage increase was frozen during at the national poverty line was 17.8 percent 2021–22 to save budgetary resources to finance in 2019/20. The simulation analysis, which did rising spending demand to mitigate impacts not account for implications of COVID-19 or for of COVID-19. In addition, the government has the fiscal policy response to support households increased social security benefits for former civil between 2020 and 2022, suggests that inflation servants and veterans. The increases have been could increase poverty by 4 percentage points introduced for former civil servants who received over the poverty rate in 2019/20. ©Shutterstock/Yosanon Y CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 23 CHAPTER 1 Recent Economic Developments and Outlook Last year’s fiscal deficit Public debt stock reached is estimated to have 33.7 percent of GDP, of narrowed to 4.7 percent which 99.8 percent is of GDP public external debt Thanks to a rapid expansion of domestic The authorities have been filling the pandemic- revenue and consolidated expenditure, the induced widening financing gap primarily fiscal deficit is estimated to have narrowed with rising proceeds from loan disbursements, to 4.7 percent of GDP in 2022 (figure 21). supplemented by drawdowns of government Last year, revenue, including grants, rapidly deposits (fiscal reserves). More importantly, the improved and was estimated to have reached authorities continued to follow the borrowing 23.2 percent of GDP in 2022, boosted largely by principle of only contracting external debt on buoyant tax revenue, thanks to the economic concessional terms, until 2022, when domestic recovery and continued revenue administration debt (government securities) was introduced, to improvements. Expenditure is estimated to have help maintain a low risk of a debt distress rating. declined to 27.9 percent of GDP as expenditure on goods and services and capital expenditure By end-2022, Cambodia’s public debt-to- moderated as some pandemic-induced spending GDP ratio reached 33.7 percent or US$9.98 such as COVID-19-related health expenditures billion in outstanding debt (table 1),14 of which were phased out. The fiscal deficit was largely the US$9,970.5 million (or 99.8 percent) is financed by external funds which accounted public external debt and US$17.5 million (or 0.2 for about 90 percent of the financing gap. percent) is public domestic debt. Of US$9,970.5 The remaining 10 percent was financed by million public external debt, bilateral debt and a drawdown of government deposits (fiscal multilateral debt accounted for 67.6 percent reserves), which stood at 17.8 percent of GDP by and 32.4 percent, respectively. Triggered by December 2022, down from 23.6 percent at the the pandemic when revenue collection slowed end of 2020. and demand for health and social assistance Figure 21 The general government deficit Figure 22 General government surplus/ (percent of GDP) deficit and financing (percent of GDP) (percentage points) 30 25 8.0 6.0 20 4.0 15 2.0 10 0.0 5 -2.0 0 -4.0 -5 -6.0 2018 2019 2020 2021 2022e 2023p -10 2018 2019 2020 2021 2022e 2023p Foreign financing Debt amortization Domestic financing Financing Total revenue (and grants) Total expenditure Overall balance Sources: Budget Settlement Laws; and World Bank staff estimates and projections. Note: e = estimates; p = projections. Sources: Budget Settlement Laws; and World Bank staff estimates and projections. Note: e = estimates; p = projections. 14 Ministry of Economy and Finance 2023a. 24 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 1 Recent Economic Developments and Outlook Table 1 Public debt stock, newly signed loans, and loan disbursements Debt stock as of 2022 2022 loans 2022 disbursement Amount Share Amount Share Amount Share (US$ mln) (%) (US$ mln) (%) (US$ mln) (%) Top 3 bilateral creditors China 4,001.7 40.1 567.3 26.5 301.1 22.4 Japan 1,077.7 10.8 448.0 21.0 386.2 28.7 Republic of Korea 482.3 4.8 351.1 16.4 60.4 4.5 Top 3 multilateral creditors ADB 2,051.2 20.6 373.0 17.4 238.3 17.7 World Bank 933.6 9.4 262.0 12.3 268.9 20.0 IFAD 129.7 1.3 0.0 0.0 29.8 2.2 Other bilateral/ 1,294.4 13.0 136.5 6.4 60.3 4.5 multilateral creditors Total 9,970.5 100.0 2,137.8 100.0 1,345.0 100.0 Sources: Ministry of Economy and Finance 2023a. spending rose, Cambodia’s debt accumulation moderate risk rating. However, the breaches are increased to 33.7 percent of GDP in 2022, up small, short-lived, and driven by the exceptional from 28.1 percent of GDP in 2019. External volatility of exports in 2020 that has increased borrowing remained highly concessional, with a the sample volatility for the standardized shock. weighted grant element of 44.8 percent in 2022. Moreover, other debt burden indicators are The weighted average interest rate of contracted projected to remain well below their thresholds loans was 1.09 percent per year, while weighted under the baseline and the shock scenarios. average maturity was 26.7 years. Of total loans contracted in 2022, 69.0 percent financed the Cambodia’s largest official creditor is China. country’s public infrastructure sector such as Total debt owed to China reached US$4.0 billion, transport, irrigation, energy, and water supply, or 40.1 percent of total external debt stock by while the remaining 31.0 percent funded other end-2022. Cambodia’s second-largest creditor is prioritized (non-infrastructure) sectors such as the Asian Development Bank, to which it owed health, education, and agriculture. US$2.05 billion, or 20.5 percent of total external debt stock. Cambodia’s third-, fourth-, and fifth- The joint World Bank/International Monetary largest creditors are Japan, the World Bank, and Fund Debt Sustainability Analysis conducted in Korea, accounting for 10.8 percent, 9.3 percent, 2022 indicated that Cambodia remained at low and 4.8 percent of total external debt stock, risk of external and overall debt distress under respectively. Old debt accounted for 6.3 percent the Low-Income Countries Debt Sustainability of total external debt stock. Public debt is mainly Framework.15 The total public and publicly denominated in U.S. dollars, which accounted guaranteed debt-to-GDP ratio is projected to for 44.2 percent of total debt stock, followed by rise by around 4 percentage points during the Special Drawing Rights (SDRs), Chinese yuan, next decade. The present value of the external Japanese yen, and euro-denominated debt, debt-to-GDP ratio breaches its threshold in accounting for 21.2 percent, 12.3 percent, 10.8 the exports stress test, which would imply a percent, and 6.8 percent, respectively. 15 International Monetary Fund 2022a. CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 25 CHAPTER 1 Recent Economic Developments and Outlook Outlook 2023, thanks to rising post-pandemic operating expenses which include an across-the-board public Cambodia’s real GDP growth for 2023 is sector wage increase and an increase in goods projected to accelerate further, reaching 5.5 and services expense as well as general election- percent (see table 2). Despite the easing of goods related spending and the hosting of the Southeast exports, the current account deficit is expected Asian Games and the ASEAN Para Games. to improve to 19.3 percent of GDP on the back of the recovering services exports, especially tourism Over the medium term, the economy is receipts and remittances. Despite the recent expected to trend back to potential, growing at decline in approved FDI projects, continued robust 6 percent. Goods and services exports and FDI capital inflows and concessional financing will inflows are expected to be bolstered by the newly continue to largely cover external financing needs. ratified free trade agreements, a substantial increase in private and public investment in key The fiscal deficit is expected to widen to 6.4 physical infrastructure such as seaports and percent of GDP. Revenue, including grants, is roads, especially under public-private partnership, improving, and is projected to remain strong, and structural reforms. Poverty is expected to reaching 23.5 percent of GDP in 2023. Expenditure decline due to the projected economic recovery is expected to increase to 29.9 percent of GDP in and moderating inflation. Table 2 The macro outlook indicates continued economic recovery 2021 2022e 2023p 2024p 2025p National Accounts and Prices GDP at constant market prices (% change) 3.0 5.2 5.5 6.1 6.3 Agriculture 1.2 0.7 1.5 1.5 1.5 Industry 9.4 8.3 4.0 8.0 9.6 Services -2.7 2.2 10.6 7.4 5.9 Consumer Price Index 2.8 5.5 2.5 2.5 2.0 General Government (% of GDP) Revenue and grants 22.0 23.2 23.5 24.0 25.0 Expenditure and net lending 29.0 27.9 29.9 29.0 29.2 Overall balance (including grants) -7.0 -4.7 -6.4 -4.9 -4.2 Foreign financing 4.2 5.6 4.5 4.3 3.9 Net domestic financing (from current savings) 3.8 0.4 3.3 2.0 1.7 Amortization -1.1 -1.2 -1.3 -1.4 -1.4 Money and Credit Broad money (% change) 20.0 8.2 7.2 9.0 15.6 Credit to the private sector (% change) 23.2 18.9 12.5 15.0 18.1 External Sector (US$m unless otherwise) Exports (goods and services) 18,565.9 24,494.7 29,149.5 35,679.0 45,186.1 Imports (goods and services) 28,120.6 38,761.9 42,333.4 49,528.1 57,945.5 Foreign Direct Investment, net inflows 3,483.5 3,578.8 4,380.6 4,745.7 5,167.2 Gross official reserves 20,272.3 17,784.6 15,828.3 16,145.4 18,085.3 (months of imports) 8.1 7.0 6.0 5.5 5.0 Current account (percent of GDP) -42.6 -26.3 -19.3 -16.1 -13.2 Exchange rate (riel per US$ average) 4,100.0 4,150.0 4,110.0 4,100.0 4,090.0 Debt Stock and Service Total public debt (% of GDP) 35.2 33.7 35.1 35.6 35.9 Memorandum items: Nominal GDP, USD million 26,952.7 29,647.4 32,425.5 35,383.9 38,565.0 Sources: Cambodian authorities; World Bank staff estimates and projections. Note: e = estimates; p = projections. 26 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 1 Recent Economic Developments and Outlook Challenges and risks steps to enhance value for money and spending efficiency would ensure high spending translates The outlook is, however, subject to downside into better outcomes, as discussed in more detail risks. An extended slowdown in external in part 2 of this report. demand could weaken Cambodia’s export- oriented manufacturing, which generates Safeguarding financial stability also remains about 40 percent of total employment in the a priority. The recent rapid credit growth industrial sector (17.3 percent of total non- and relatively high private sector debt, with a farm employment). Continued global financial concentration in real estate related exposures tightening could affect the highly leveraged pose key risks to Cambodia’s macro-financial financial sector, which has been partly behind the stability. Intensified supervision is called for as recent construction boom. A renewed oil price pandemic measures such as loan restructuring shock may stoke inflation and dampen domestic and forbearance are phased out. This could include enhanced focus on stress testing consumption. Domestically, concentration of of individual institutions, systematic onsite domestic credit in the construction sector inspections, further aligning the regulatory remains a key risk to financial stability. framework with international standards, and On the upside, stronger-than-expected global further assessing the quality of loan portfolios, growth could mitigate the downside drag among others. In parallel, the authorities should of weak external demand. A stronger-than- continue with efforts to prepare legislation expected rebound in China could bolster stronger on deposit insurance and bank resolution. To tourism receipts, exports, and FDI inflows which prepare for increasing levels of non-performing could help offset the expected decline in advanced loans (NPLs), the authorities should ensure that economies to a greater extent than assumed resolution options are ready to be deployed as in the baseline. In addition, growth in advanced needed. Similarly, the country’s insolvency regime can be improved. Given concerns around shadow economies, while likely slower than last year, banking activities, such as credit issued by may also turn out to be stronger than expected, construction or real estate developers to buyers dampening the projected decline in exports. of residential real estate, it will be of critical importance to collect the data necessary to Policy options monitor and assess the legality of these activities. Macroeconomic policy should continue to To enhance the long-term resilience and support growth and employment, while competitiveness of the economy, efforts are maintaining macro-financial stability. This needed to further promote export product has become more challenging in the context diversification. Unlike other countries in the of tightening financial conditions and rising region, Cambodia has had limited success in private debt levels. But inflation has quickly diversifying outside of garments, footwear, retreated to pre-pandemic levels, allowing the while the country’s agroprocessing capacity authorities to continue with accommodative remains limited. To move to the next stage of monetary policy by maintaining or lowering participation in global value chains (GVCs), the the reserve requirement ratio. While fiscal policy mix will need to evolve. First, attention consolidation will be necessary over the medium should be paid to contract enforcement, term, this consolidation can proceed at a protecting intellectual property rights, and relatively gradual pace given manageable public strengthening national certification and testing debt levels. Cambodia has the fiscal space to capacity to ensure compliance with international maintain or even increase growth-enhancing standards. Second, lowering barriers to trade and spending on connectivity infrastructure and improving connectivity to markets would expand human development which will boost the the size of the market for Cambodia’s products productive capacity of the economy over and improve access to the inputs needed for the longer term. Continuing to provide social production. Third, continue improving the assistance to the poor, while stemming the education and skills of Cambodia’s labor force by learning loss that Cambodia experienced during investing in human capital. Fourth, harness the the time of COVID-19 and building back better, digital economy to support firms to integrate is also necessary to promote inclusive growth. into GVCs through digital platforms as well as by Accompanying increased public investments with connecting value chain participants. CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 27 ©World Bank 28 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 2 Special Focus From Spending More Over the past decade, Cambodia has maintained prudent fiscal policies. Fiscal deficits have been to Spending Better – contained, especially before the COVID-19 Toward Improved Human pandemic. Public debt remains low. Revenue mobilization has been steadily improved, creating Development Outcomes16 vital fiscal space to enable a significant increase in public expenditures (figure S.1), particularly Introduction in the social sectors. Social sector expenditures significantly increased from 4.6 percent of This special focus section of the Cambodia GDP in 2011 to 10.5 percent in 2021, while the Economic Update examines public expenditures spending in other sectors was stable. This large and outcomes in the health and education expansion of public spending on critical social sectors. It is based on the recent joint exercise sectors puts emphasis on commensurate efforts on a budget management effectiveness study to improve the quality of public services and (Public Expenditure Review) between the ensure higher spending translates into better Cambodia Ministry of Economy and Finance human development outcomes. More importantly, and the World Bank. it highlights the importance of achieving efficiency and equity to ensure that increased spending translates into improved outcomes and equitable service provision. Figure S.1 Government overall budget at the national level, by category (riels, million), 2011–21 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Wage Non-wage Capital, domestically financed Capital, externally financed Sources: Budget Settlement law and World Bank Staff. This Special Focus was written by Serdar Yilmaz, Sokbunthoeun So, and Khy Touk. This section of the report is financed by a 16  Multi-Donor Trust Fund on Public Finance and Service Delivery with contributions from Australia and the European Union. CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 29 CHAPTER 2 Special Focus from Spending More to Spending Better – Toward Improved Human Development Outcomes Expanded public spending enabled the government to accumulate a relatively large fiscal reserve, amounting to supported by strong 23.7 percent of GDP at the end of 2020.18 domestic revenue The improvement in tax revenue put Cambodia among the leading countries in the region and in Cambodia sustained an average annual growth a better position than many other lower middle- rate of 7.6 percent between 1995 and 2019, income countries (figure S.2, panel B). Although making it one of the fastest-growing economies domestic revenue saw a decline in 2020 and in the world.17 The strong economic growth 2021 due to the impact of the COVID-19 performance together with a strengthened tax pandemic on the economy and tax relief administration capability under the Revenue provided to affected firms, Cambodia’s Mobilization Strategy 2014–2018 and 2019– domestic revenue collection growth rate 2023 resulted in a substantial increase in was able to rebound almost to the pre-COVID domestic revenue. Overall domestic revenues level, thanks largely to the country’s efforts reached 25.1 percent of GDP in 2019, up from to improve tax collection and administration 12.8 percent in 2011 (figure S.2, panel A). This and a broad-based economic recovery. Figure S.2 Government overall revenue and expenditure increase, 2011–22 Panel A. Government overall revenue Panel B. Tax revenue (% of GDP), 2019–20 increase: Domestic revenue (% of GDP) 30.0 25.1 Cambodia 25.0 21.8 22.4 20.1 20.0 19.8 Thailand 20.0 17.6 17.8 18.5 15.0 14.5 Philippines 12.8 20.0 15.0 17.4 18.3 16.2 16.7 16.5 Singapore 15.0 10.0 13.8 14.8 11.4 11.8 Malaysia 10.1 5.0 Upper middle income 0.0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 EAP (excl. high income) Domestic revenue Tax revenue 0.0 5.0 10.0 15.0 20.0 Source: Cambodian authorities. 2019 2020 Source: World Development Indicator 17 Although growth was strong, reaching 7.1 percent in 2019, the COVID-19 pandemic caused sharp decelerations in most of Cambodia’s main engines of growth in the first quarter of 2020. 18 World Bank 2022. 30 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 2 Special Focus from Spending More to Spending Better – Toward Improved Human Development Outcomes Availability of fiscal space and increased spending in the healthcare and education sectors, the share of social sector enabled higher spending, spending increased to 10.5 percent of GDP in especially in social sectors 2021 from 4.6 in 2011 (figure S.3, panel A). However, Cambodia’s budget allocation boost was Increased fiscal space allowed the government driven partly by across-the-board salary increases. to boost total planned spending. Planned The public sector wage bill grew quickly during the expenditure increased from 20.2 percent of past several years before the pandemic. Non-wage GDP in 2011 to 27.9 percent in 2021. In line recurrent allocation increased at a slower pace, with the government’s public expenditure policy, from 6.1 percent of GDP in 2011 to 8.6 percent in which prioritized human capital accumulation 2021 (figure S.3, panel B). Figure S.3 Government overall budget increased between 2011 and 2022 Panel A. Government expenditure, by sector grouping (% of GDP), 2011–21 30 27.9 26.8 24.0 25 21.7 21.9 21.0 20.9 20.6 6.3 20.2 20.3 6.4 19.5 20 5.4 8.4 6.1 5.5 15 7.8 8.7 7.3 6.3 5.6 10.5 8.9 6.8 10 6.3 6.9 4.5 5.6 4.6 5.4 5.3 4.5 4.1 4.6 4.4 3.1 5 3.1 3.7 3.9 4.1 2.9 3.3 3.3 4.7 3.4 4.8 4.8 4.7 2.8 2.5 2.6 2.5 2.9 2.8 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 General administration Defense and security Social sectors Economic sectors Multisectors Total expenditure (RHS) Panel B. Non-wage recurrent budget allocation, by economic classification (% of GDP), 2011–21 10 9.0 8.6 8.1 1.3 0.8 8 7.3 6.8 7.0 6.8 6.6 1.4 6.5 6.4 6.1 1.2 0.8 0.8 0.9 6 0.7 0.8 1.2 0.6 3.8 4.5 2.2 2.3 2.5 3.2 2.3 2.1 2.2 2.2 2.3 4 0.4 0.4 0.4 0.4 0.4 0.5 0.3 0.5 0.6 0.3 0.3 1.4 1.3 1.7 1.8 1.8 1.8 1.8 1.3 1.2 1.8 2 1.5 1.6 1.8 1.9 1.7 1.6 1.6 1.6 1.6 1.5 1.6 1.3 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Purchases Services Financial charges Subsidy, social benfits Other non-wage NON-WAGE (RHS) Sources: Budget Settlement Law; World Bank staff. CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 31 CHAPTER 2 Special Focus from Spending More to Spending Better – Toward Improved Human Development Outcomes After a decade of increases for its civil servants. Between 2011 and 2021, the public sector wage bill as a share compensation reform of GDP almost doubled, reaching 7.2 percent and salary increases, the of GDP in 2021, up from 4.4 percent of GDP in average public sector wage 2011. This represented a tripling of civil servants’ minimum wage compared to 2013, having now exceeds the average reached the target of 1 million riels a month by private sector wage 2018. Further, while the government increased the average monthly take-home pay per civil Cambodia’s public expenditure boost was servant, administrative sectors benefited the driven partly by across-the-board salary most from the increase (figure S.4). Figure S.4 Monthly average pay of Cambodian civilian civil servants, 2021 1,753 1,044 901 839 796 726 722 661 651 496 461 457 453 431 413 403 398 372 371 370 363 339 318 318 316 3313 311 311 304 265 MFAIC MoI Royal Palace MPTC MME MoC Civil aviation MoJ ACU MEF MLVT MPWT CoM MoLMUC MoE MISTI MoEYS MAFF MoH MRD MoP MoT MCS Information Culture Women MoWRM MoNSRI Social Affairs Religion Source: Cambodian authorities (2021 Budget Settlement Law). Note: Actual spending under chapter 64 for all ministries (except for MoH which is for 2020) and 2022 civilian civil servant statistics (MCS). The increase in the public sector wage bill higher per capita income levels) spend less places Cambodia among those countries that than Cambodia on their wage bill (figure S.5, spend a large share of government revenues panel A), and in fact Cambodia is among the on public wages, especially compared to countries spending the highest share of general regional peers (figure S.5). All regional peers government revenues on the public wage bill except Vietnam and Palau (both of which have (figure S.5, panel B). Figure S.5 Footprint of the public wage bill Panel A. Wage bill (as % of public Panel B. Wage bill and GDP % in the EAP expenditure), 2005–19 region 45.0 40% Vietnam 40.0 Palau 35% Cambodia 35.0 Papua New Guinea 30.0 30% Indonesia 25.0 Micronesia 20.0 25% Philippines Thailand 15.0 20% 10.0 Mongolia Myanmar 5.0 15% 0.0 Timor Leste 2005 2007 2009 2011 2013 2015 2017 2019 10% Thailand Cambodia Myanmar 7 7.5 8 8.5 9 9.5 10 Philippines Indonesia Vietnam Log of GDP PC (constant 2015 PPP) Source: World Bank Worldwide Bureaucracy Indicators based on IMF data. 32 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 2 Special Focus from Spending More to Spending Better – Toward Improved Human Development Outcomes Cambodia’s public sector workers currently This represents a major improvement from the earn a higher average salary than their private 2003 level, when the public sector wage was sector counterparts.19 Average monthly public 38.4 percent lower than the private sector sector pay reached 1.50 million riels in 2019, counterpart (figure S.7). During 2003–12, compared to 1.25 million riels for the private because of the low wages offered by the sector. Cambodia’s public sector wage premium government (compared to those in the private relative to private sector wage employees (even sector), government jobs were unattractive to after accounting for observable characteristics the newly graduated and other skilled workers. such as experience, educational qualification, This led to problems among government gender, and location) was 18.8 percent in 2019 employees, such as moonlighting, while other (figure S.6).20 This positive wage premium young skilled workers left the government for experienced by public sector workers is higher more generous private sector jobs, thereby than the regional average of 3 percent and adversely affecting government efficiency.21 is among the highest compared to all its After 2013, compensation reform under the peers, with only the Philippines being higher. National Program for Public Administration Furthermore, the results hold in the education and health sector, where the wage premium Reform resulted in a restructuring of the salary for working in the public sector is also positive scale and this, together with continuous annual and significant in the country (6 percent in across-the-board salary increases, resulted healthcare and 17 percent in education). in substantial improvement in basic civil servant salaries. This higher compensation of Average public sector wage was 18.8 percent public sector workers made room for a more higher than the private sector wage in 2019. competitive wage for the public workforce. Figure S.6 Public sector wage premium (compared to all private sector workers) 45.0% 18.8% 6.9% 1.7% 2.8% -3.4% -15.1% -24.9% Cambodia Cambodia Thailand Micronesia Timor Leste Mongolia Indonesia EAP average Source: World Bank’s Worldwide Bureaucracy Indicators Figure S.7 Cambodia’s public sector wage premium over time 18.8% -24.8% -38.4% -43.4% -48.7% 2003 2006 2008 2012 2019 Source: World Bank’s Worldwide Bureaucracy Indicators 19 While public sector wage levels are an important determinant of personnel motivation and of state capacity, they also have important consequences for expenditure efficiency, fiscal sustainability, and equilibrium outcomes in the entire labor market. However, answering the question “does the public sector pay too much or too little” naturally requires an appropriate comparator. Comparing the wages of public and private sector workers is analytically useful given that the most likely outside option to employment in the public sector is the private sector. 20 These wage differentials do not take additional sources of compensation like allowances and in-kind transfers into account, which are likely higher in the public sector. Therefore, if anything, these estimates may be underreporting the wage premia. However, the lack of such information on the household surveys affects the ability to perform this additional analysis. 21 Oudom 2012. CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 33 CHAPTER 2 Special Focus from Spending More to Spending Better – Toward Improved Human Development Outcomes The difference in pay between the public and Technical occupations enjoy a higher premium private sector varies by level of education. in the public sector than senior managerial Public sector workers with tertiary education occupations. In Cambodia, public sector earn 7.5 percent more than their private sector technical specialists enjoy 40.4 percent higher counterparts. However, public sector workers pay than private formal workers, mainly driven with no education make 16.4 percent less than by the high proportion of police officers and their private sector counterparts.22 The wage gap public sector administrative officers. All other between public and formal private sector workers occupations in the public sector pay a wage is highest among workers with secondary penalty, and the highest penalty is observed education, at 14.7 percent in favor of public among senior officials (65 percent), as seen sector workers (figure S.8). A high wage premium in figure S.9. This is usually observed in other among highly educated workers, together with countries, where premiums are higher for entry- a larger representation of these workers in level civil servants than senior civil servants, the public sector relative to the private sector, which may be particularly disruptive to the suggests potential skilled labor shortages for the overall labor market. Given these high premia private sector, with big implications for public among specialists, it will not be surprising to see sector wage bill sustainability. a massive demand for these public sector jobs, with hundreds of applicants for each vacancy. Figure S.8 Wage premium by education Figure S.9 Public sector wage premium by level (Compared to private formal workers) occupational group (Compared to private formal workers) 14.7% 40.4% 7.5% 1.3% -5.1% -20.8% 23.8% -16.4% No education Primary Secondary Tertiary -65.0% education Education Education Senior Professionals Technicians Clerks Elementary officials occupation Source: World Bank’s Worldwide Bureaucracy Indicators This heterogeneity in the wage gaps by education level could be caused by many factors, and it is impossible to identify these 22  factors without data from household surveys. It may stem from different productivity gaps in the public sector that vary across occupations, such as stronger union bargaining power of lower-skilled employees. 34 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 2 Special Focus from Spending More to Spending Better – Toward Improved Human Development Outcomes Female workers in the public sector suffer a education industry face a wage penalty of 7 significant gender wage gap in many segments percent compared to their male counterparts of the public sector workforce. Globally, women working similar jobs with similar hours (figure often earn significantly less than men for S.10, panel B), even after accounting for doing the same work in both the public and differences in age, educational qualifications, private sectors. In Cambodia, females earn 94 and location. In public administration, women percent of the wage of males in the private experience a wage penalty of 30.7 percent. sector and 89 percent of the wage of their male However, women in healthcare earn almost 10 counterparts in the public sector, and this wage percent more than men in the same industry. gap observed in the public sector has increased While the wage penalty experienced by women is over time (figure S.10, panel A). Moreover, observed globally, in Cambodia, the size of these women in Cambodia perform most tasks in the penalties is higher. The average global gender public sector education and healthcare sectors, wage penalty is 3 percent for education and but their participation is mostly confined to 2 percent for public administration industries, lower-paid occupations. Women working in the respectively. Figure S.10 Gender wage gap in Cambodia Panel A. Female-to-male wage ratio by Panel B. Public sector gender wage premium sector of employment by industry 110% 9.8% 100% 90% 85% -7.0% 70% 2003 2006 2009 2012 2019 -30.7% Public Education Healthcare Private sector Public sector administration ©Shutterstock/MindStorm CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 35 CHAPTER 2 Special Focus from Spending More to Spending Better – Toward Improved Human Development Outcomes Education spending 70 percent in 2018. Non-wage expenditures as a share of the total MoEYS budget slightly increased but has yet increased during the same period. However, the to translate into better budget allocation for capital expenditure has dropped significantly, declining from 13 percent learning outcomes in 2018 to only 3 percent of the total MoEYS budget in 2021 (figure S.11). Putting emphasis on human capital development in the Cambodian government’s While average public sector pay is higher national development strategy, the than private sector pay, human resources Rectangular Strategy23 Phase 4, government management remains a challenge. The spending for social sectors increased education sector continues to face difficult significantly. Cambodia had increased spending challenges, particularly in terms of shortages on education, but that budget increase and an uneven distribution of teachers. At the centered on the wage bill, which occurred before national level, the total number of teachers is COVID-19, and was driven mainly by a rise in generally adequate. However, class size remains salary for the large number of education staff. relatively larger than in Cambodia’s ASEAN To improve the standard of living for education peers. Cambodia had the highest student-teacher staff, especially teachers, the government has ratio for primary school from 2013 to 2018. been increasing salaries since 2014. Starting For secondary school, the student-teacher ratio salaries for upper secondary teachers doubled remains high, but just lower than in Thailand between 2014 and 2020 due to a rise in both and Myanmar for the same period. The larger base salary and functional allowance. In addition, class size in Cambodia is mainly attributable to the total number of educational staff increased the inefficient distribution of teachers. At the by 6 percent during the same period, from national level, based on MoEYS’ 2018 norm on 107,395 in 2014 to 114,170 in 2020. Therefore, student-teacher ratios, Cambodia had an overall wage bill increases have squeezed out budget shortage of 12,305 teachers in 2021. There was space for capital expenditures. For example, a teacher shortage of 4,833 in preschool and wage expenditure as a share of total Ministry of 9,959 in primary school. However, there was a Education, Youth and Sport (MoEYS) expenditure surplus of teachers at the lower secondary and reached nearly 80 percent in 2021, up from upper secondary level for the same year. Figure S.11 Economic classification of MoEYS budget (% of total budget expenditure) 4 5 3 100% 13 9 18 18 19 80% 17 18 60% 40% 78 76 78 70 73 20% 0% 2017 2018 2019 2020 2021 Wage Non-wage Capital Sources: Budget Law 2017-2022 and World Bank staff. Cambodia’s Rectangular Strategy was formulated “to guide the implementation of the agenda of the Royal Government.” Phase 23  IV specifically addresses Growth, Employment, Equity and Efficiency. 36 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 2 Special Focus from Spending More to Spending Better – Toward Improved Human Development Outcomes Education infrastructure expenditure relied and MoEYS’ capital budget. Planned capital mainly on development partner (DP) capital expenditures funded by DPs as a share of allocation. Between 2017 and 2021, the DP- MoEYS’ budget represented 6 percent in 2021, a funded budget as a share of MoEYS’ budget steady decline from 10 percent in 2017. MoEYS’ was around 1.5 to 3.3 times MoEYS’ planned capital expenditures budget dropped three expenditures during the same period. Education times, from 12 percent of the budget in 2018 infrastructure investment has declined, to only 3 percent in 2021 (figure S.12, panels A driven by a decrease in the DP-funded budget and B). Figure S.12 MoEYS recurrent and capital expenditures, 2017–21 Panel A. MoEYS’ budget by category, Panel B. MoEYS’ budget by category (% of 2017–21 total), 2017–21 4,000,000 100% 10 9 9 6 12 3 3 5 3,500,000 80% 12 8 3,000,000 KHR, million 2,500,000 60% 2,000,000 87 92 40% 79 81 86 1,500,000 1,000,000 20% 500,000 - 0% 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 Capital expenditures, externally financed Capital expenditures, externally financed Capital expenditures, domestically financed Capital expenditures, domestically financed Recurent expenditures Recurent expenditures Sources: Budget settlement law and WB staff. Sources: Budget settlement law and WB staff. ©Shutterstock/Vladimir Zhoga CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 37 CHAPTER 2 Special Focus from Spending More to Spending Better – Toward Improved Human Development Outcomes Budget execution for recurrent expenditures strengthen the planning of investment projects.24 is in line with budget plans. However, While Cambodia’s gross national income per budget outturns for capital expenditures— capita is the lowest compared to regional both domestically and externally financed— neighbors, Cambodia’s education spending of 3.12 significantly fluctuated (figure S.13). This percent of GDP is relatively high—higher than Lao suggests weaknesses in planning and execution PDR, on par with Thailand (3.14 percent of GDP), of capital expenditures. Making public investment and slightly lower than Indonesia (3.49 percent of projects more comprehensive and aligning public GDP), the Philippines (3.73 percent of GDP), and investment projects with the budget process could Malaysia (3.91 percent of GDP) (figure S.14). Figure S.13 Planned capital spending and budget outturn MoEYS’ budget outturn, 2017–21 250% 200% 150% 100% 50% 0% 2017 2018 2019 2020 2021 Recurrent Capital, domestically financed Capital, externally financed Sources: Left: Budget settlement law, MEF and WB staff; Right: PIMA 2019. Figure S.14 Government expenditures on education: Percent of GDP compared to gross national income per capita, 2021 12,000 4.11% 3.91% 5% 3.73% 3.49% 4% 10,000 3.12% 3.14% 4% 8,000 3% US$/year % of GDP 3% 6,000 2.29% 2% 4,000 2% 1% 2,000 1% - 0% Cambodia Lao PDR Philippines Vietnam Indonesia Thailand Malaysia GNI per capita Government expenditure on education (% of GDP) Source: WDI IMF, Cambodia Public Investment Management (PIMA) 2019. 24  38 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 2 Special Focus from Spending More to Spending Better – Toward Improved Human Development Outcomes Education outcomes have improved over the last S.15 shows that net enrollment rates were higher decade, but the gap between urban and rural in urban than rural areas, particularly after areas remains. Between 2009 and 2019, net primary education. enrollment rates for primary education increased from 81 percent to 90 percent, for lower Despite the improvement, Cambodia lags secondary from 31.5 percent to 47.5 percent, and behind its ASEAN peers in education outcomes, for upper secondary from 17.9 percent to 30.9 including literacy rates (figure S.16). Completion percent. The literacy rate for population aged 15 rates are also lower than in most ASEAN and above increased from 73.9 percent to 81.9 countries, suggesting that more work needs to be percent over the same period. However, there is done to retain students in secondary education. a big difference between urban and rural areas Also, dropout rates at primary school remained in terms of net enrollment and literacy rate. the highest in the ASEAN region. On the positive Although Cambodia has reduced the percentage side, those with no schooling dropped from 28 of people with no schooling, the completion rate percent in 2009 to 18 percent for the 2019/20 for primary and secondary remained flat. Figure school year. Figure S.15 Net enrollment rate, urban and rural areas, 2009–2019/20 100% 80% 60% 40% 20% 0% Primary Lower Upper Primary Lower Upper Primary Lower Upper Primary Lower Upper secondary secondary secondary secondary secondary secondary secondary secondary Total Phnom Penh Other urban Rural Cambodia Areas 2009 2014 2019-2020 Sources: CSES 2014 and CSES 2019-2020. Figure S.16 Cambodia literacy rate, and compared with its ASEAN peers Panel A. Cambodia literacy rate, 2009– Panel B. Cambodia literacy rate compared to 2019/20 other ASEAN countries 100% 100% 90% 95.7% 80% 94.0% 94.9% 95% 70% 60% 50% 90% 89.0% 40% 87.0% 30% 20% 85% 82.0% 10% 0% 80% 2009 2014 2019-20 2009 2014 2019-20 2009 2014 2019-20 2009 2014 2019-20 75% Total Phnom Penh Other urban Rural Cambodia Lao PDR Myanmar Thailand Malaysia Vietnam Cambodia Areas (2020) (2021) (2019) (2021) (2019) (2019) Sources: Panel A: CSES 2014 and CSES 2019–20; panel B: Cambodia extracted from CSES 2019–20 and other countries sourced from World Development Indicators (WDI) (extracted in March 2023). CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 39 CHAPTER 2 Special Focus from Spending More to Spending Better – Toward Improved Human Development Outcomes The increase in spending on education has not Figure S.17 Learning outcomes for Grade 6, yet translated into learning outcomes. Learning 2013–21 outcomes for students in Grade 6 and Grade 8 Percentage of questions correctly answered are still low. Between 2013 and 2021, an average 60% student in Grade 6 could answer less than 52 percent of Khmer questions correctly. Student 50% learning outcomes for mathematics were even 40% poorer; on average, Grade 6 students answered less than half the questions correctly—43 30% percent in 2013, 48 percent in 2016, and 38 20% percent in 2021 (figure S.17). The deterioration of 2021 test results were due to the negative 10% impact of the COVID-19 pandemic. Similarly, 36 0% percent, 19 percent, and 52 percent of students in Grade 8 performed below basic proficiency 2013 2016 2021 levels for math, Khmer reading, and physics, Khmer Math respectively, in 2017 (figure S.18). Source: MoEYS. Note: Scaled score were converted with a mean of 500 and standard deviation of 100. Figure S.18 Percentage of Grade 8 students proficient in Khmer reading and mathematics, 2014–17 Panel A. Proficiency of Grade 8 students in Panel B. Proficiency of Grade 8 students in math Khmer reading 50 50 45 45 Percentage of student Percentage of student 40 40 35 35 30 30 25 25 20 20 15 15 10 10 5 5 0 0 Below basic Basic Proficient Advanced Below basic Basic Proficient Advanced Level of proficiency Level of proficiency 2014 2017 2014 2017 Panel C. Proficiency of Grade 8 students in physics 60 Percentage of student 50 40 30 20 10 0 Below basic Basic Proficient Advanced Level of proficiency 2014 2017 Source: MoEYS. Note: Scaled scores were converted with a mean of 500 and a standard deviation of 100. 40 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 2 Special Focus from Spending More to Spending Better – Toward Improved Human Development Outcomes A study on Cambodia’s experience in the Capital expenditures at the MoH are mainly Program for International Student Assessment financed by DP-funded capital allocation. for Development (PISA-D) found that the Between 2017 and 2022, planned government performance of students in Cambodia was yet capital investment allocation as a share of total to reach the level at which they were expected budget allocation accounted for 4 percent or to learn. A low percentage of Cambodian less, except in 2021, when planned government students at age 15 achieve a minimum level capital expenditures reached 18 percent (figure of proficiency—8 percent in reading and 10 S.20), as a part of a broader COVID-19 response. percent in mathematics. Students in Cambodia Finances for capital expenditure mainly come performed below the average score for other from external funds (development partners). participating ASEAN countries (Indonesia, Singapore, Thailand, and Vietnam) in three Figure S.19 MoH budget expenditures, domains: reading, mathematics, and science. On 2017–22 average, Cambodia scored 321 for reading, 325 for mathematics, and 330 for science on the 10% PISA-D, which is lower than the ASEAN average scores of 430 for reading, 435 for mathematics, 8% 8.6 8.8 8.9 and 439 for science. Less than 2 percent of 7.3 students in Cambodia showed an ability to 7.0 6% perform at the average competency level of Organisation for Economic Co-operation and Development (OECD) countries. In reading, they 4% performed significantly lower than the PISA-D average (346 score points).25 2% 2.0 2.1 2.5 1.9 1.7 Public health policy 0% 2017 2018 2019 2020 2021 effectiveness is limited Health budget expenditures (% of total government budget) by low public health Health budget expenditures (% of GDP) spending, low utilization Figure S.20 MoH budget, by category (% of rates of public health total), 2017–22 facilities, and high levels of out-of-pocket spending 100% 15 21 19 29 28 26 3 Overall public health spending mainly goes to 80% 4 18 1 public health administration, medical supplies and 2 4 equipment, and other necessities for frontline 60% services to keep public health facilities operational. The use of public facilities requires applicable user 40% 82 75 69 72 fees. Part of the public funds also finance Health 68 63 Equity Funds for the poor to access public facilities. 20% Prior to the COVID-19 outbreak, Ministry of 0% Health (MoH) budget allocations had been 2017 2018 2019 2020 2021 2022 gradually decreasing, from 8.6 percent of the total government budget in 2017 to 7 percent Capital, externally financed Recurrent Capital, domestically financed in 2020. In response to the pandemic, however, public resources allocated to the MoH increased Sources: MEF and World Bank staff by 58 percent, from 1,729,987 million riels (1.9 Note: MOH = Ministry of Health; MEF = Ministry of Economy and Finance; KHR = Khmer Riel. Recurrent expenditure budget percent of GDP) in 2017 to 2,724,907 million includes expenditures other than infrastructure such as wages, riels (2.5 percent of GDP) in 2021 (figure S.19). drugs, medical supplies, and other operating expenses. Capital expenditures budget is used to acquire infrastructure fixed assets such as hospitals or health center buildings. 25 MoEYS 2018. CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 41 CHAPTER 2 Special Focus from Spending More to Spending Better – Toward Improved Human Development Outcomes The increase in the MoH recurrent budget in million riels (0.5 percent of GDP) to 801,031 nominal terms between 2017 and 2021 was million riels (0.7 percent of GDP), driven by a driven by social benefits expenses and wages26 rise in subsidies to informal sector Health Equity (figure S.21). Social benefits expenses (Chapter Fund (Chapter 62028) and drug expenditures 62) support health service delivery and include (Chapter 62022). Planned domestically financed inpatient and operational expenses at health capital expenditure (Chapter 21) was modest facilities, drug purchases, and medical supplies in 2017 (1,199 million riels or 0.001 percent of (box 2). Between 2017 and 2021, the budget GDP), with an increase in 2020 (20,370 million for nominal social benefits expenses (Chapter riels or 0.01 percent of GDP) (figure S.22 and 62) increased by 71 percent—from 469,459 box S.1). Figure S.21 MoH recurrent budget, by economic classification (Riels, million), 2017–21 2,000,000 1,500,000 1,000,000 500,000 - Recurrent Chapter 60 Chapter 61 Chapter 64 Chapter 62 Chapter 65 Chapter 63 Chapter 21 budget Purchase Services Payroll Social benefit Susidies Tax and Investment expenditures expenses expenses expenses tarrifs expenditures 2017 2018 2019 2020 2021 Sources: MEF Note: MEF = Ministry of Economy and Finance, Actual spending on COVID-19 was excluded from social benefit expenses (Chapter 62) Figure S.22 MoH budget on social benefits expenses, by economic classification (Riels, Box S.1. Spending under Chapter 62 million), 2017–21 (Social benefits expenses) 800,000 Chapter 62021 (inpatient support and operational 700,000 expenses for health center): This chapter covers 600,000 expenses related to (i) operational expenses (water, 500,000 electricity, telephone, office supplies, and others), 400,000 (ii) government expenditures on HEF, and (iii) 300,000 contribution to Kunthea Bopha Fund. 200,000 Chapter 62022 (drugs): The expenses in this 100,000 chapter include drugs, oxygen, alcohol, and vaccines. 0 2017 2018 2019 2020 2021 Chapter 62023 (food and materials): Subsidies to blood donors, food for inpatients, food for newborns 62028 Other social benefit expenses at National Matronal and Child Health Center, 62023 Food and materials safety cloth, etc. 62022 Drugs Chapter 62028 (other social benefit expenses): 62021 In-patient and travel expenses for health center Subsidies to NSSF for female workers delivering at health facilities, subsidies to NSSF for former Source: MEF Note: MEF = Ministry of Economy and Finance; KHR = Khmer Riel, Actual recurrent spending was based on MEF data, public officials, subsidies to poor pregnant females which does not include payroll expenses at the provincial level and infants under 2 years of age, government in 2021. Actual spending on COVID-19 was excluded from other expenditure on informal sector HEF. social benefit expenses (Chapter 62028) Note: Chapter 62028 excluded COVID-19 expenses from MoH general health spending. HEF = Health Equity Fund; MoH = Ministry of Health; NSSF = National Social Security Fund. Social benefits expenses (Chapter 62) include inpatient travel expenses to a health center, drug purchase expenses, and medical 26  supplies. 42 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 2 Special Focus from Spending More to Spending Better – Toward Improved Human Development Outcomes Spending on health system administration on preventive care is the lowest among comparator remains high compared to other ASEAN countries. There should be a transition toward countries, while spending on health service higher prioritization for preventive care, including delivery (particularly preventive care) remains introducing policies to increase targeted prevention very low as a total share of public expenditures. measures where health spending is high, and In 2019, Cambodia’s spending on health system institutionalizing incentives for people to seek administration as a share of government health preventive services is desirable. expenditures (34.5 percent), was twice as high as in Myanmar, more than four times higher than in Utilization of health care services provided Vietnam, and nearly three times higher than in by public health facilities is relatively low Thailand and Malaysia (figure S.23). As a share of (figure S.24). In 2021, more than three-fourths government health expenditures, Cambodia’s public of sampled household members sought care spending on curative care (61.9 percent) is second for illness and injury from a private healthcare lowest only to Lao PDR, and lower than Myanmar provider in the last 30 days, 15.3 percent sought (65.5 percent), Vietnam (84.4 percent), Thailand care from a public healthcare provider, 8.4 percent (74.6 percent), and Malaysia (75.9 percent). When from a nonmedical provider, and 0.2 percent expenditure on preventive care is measured as a sought healthcare overseas. Low utilization share of government health expenditure, Cambodia of public health services means that public was the lowest. The share of government spending expenditure has not achieved its fullest potential. Figure S.23 Cambodia’s health spending compared to its ASEAN peers, by health care function, (% of government health expenditure), 2019 1 2 1 100% 4 3 7 7 10 11 90% 7 15 80% 70% 62 60% 51 50% 66 75 76 84 40% 30% 20% 35 35 10% 17 13 8 12 0% Cambodia Lao PDR Myanmar Vietnam Thailand Malaysia Government expenditure on other health care Government expenditure on preventive care Government expenditure on curative care Government expenditure on governance, health system and financing administration Sources: WHO-Global Health Expenditure (2022) and World Bank staff Note: MoH = Ministry of Health, Government health expenditures from 2016 to 2019 (graph a) are PPP-adjusted nominal values. Other healthcare includes rehabilitative care, long-term healthcare, ancillary services, medical goods, and other healthcare services. Figure S.24 Type of health provider consulted first 80% 76.0 69.4 70% 62.9 60% 54.0 50% 40% 30% 23.5 22.5 26.0 20.0 20% 15.3 13.1 10% 7.4 8.4 0.5 0.7 0.2 0% Public Private Non-medical Overseas 2009 2014 2019/20 2021 Source: Draft report: Analysis of Financial Risk Protection in Cambodia’s Health System using CSES (Cambodia Socioeconomic Survey) Data: 2009–2021. GIZ (2023, forthcoming) *Option for overseas treatment is not included in the 2009 CSES data. CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 43 CHAPTER 2 Special Focus from Spending More to Spending Better – Toward Improved Human Development Outcomes Cambodia spends more on health care than all low levels of government spending on healthcare its neighbors, despite low levels of government in both per capita terms (figure S.26) and as spending. Cambodia spent more than 5.7 a share of the government budget (figure S.27), percent of its GDP on healthcare from 2009 to with both lower than nearly all other countries 2019, which is consistently higher than any of its in the region. This means the remainder is ASEAN neighbors for over a decade (figure S.25). financed by external (DP) financing and This level of spending persists despite relatively out-of-pocket spending. Figure S.25 Health expenditure (% of GDP) 8 7 6 5 4 3 2 1 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Brunei Darussalam Cambodia EAP (exclude high income) Indonesia Lao PDR Low and middle income Malaysia Myanmar Philippines Singapore Thailand Vietnam Source: WDI Figure S.26 General government health expenditure per capita, purchasing power parity (current international dollars) 600 500 400 300 200 100 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Cambodia EAP (exclude high income) Indonesia Lao PDR Low and middle income Malaysia Myanmar Philippines Thailand Vietnam Sources: WDI Figure S.27 Domestic general government health expenditure (% of general government expenditure) 16 12 8 4 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam Sources: WDI 44 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 2 Special Focus from Spending More to Spending Better – Toward Improved Human Development Outcomes The volume of financing for health in some form of health insurance. In Cambodia, Cambodia is consistent with what other however, while the share of external financing countries are spending at similar income has decreased since 2015, OOP expenditure levels, but the composition of health financing remains the main financing channel for the is overly dependent on private out-of- sector (figure 28, panel A), and the share of pocket (OOP) expenditures. OOP financing OOP financing (60 percent in 2020) is well is neither an efficient nor equitable way to above what is observed on average for countries achieve universal health coverage. Total health at similar income levels (about 30 percent) expenditure per capita increased in real terms (figure S.28, panel B). from about US$35 per year in 2000 to about US$115 in 2020. Countries transitioning High out-of-pocket spending means the poor from low- to middle-income status typically are more vulnerable to income shocks and are also achieve a health financing transition less likely to have access to health services. whereby (i) the volume of financing invested In 2013 the highest quintile of income (richest) in health increases, and (ii) the composition of spent 16 times more on healthcare than the health funding transitions from external and lowest quintile (poorest), being more able to OOP dependence to predominantly prepaid afford to pay for healthcare services owing to mechanisms, such as public health financing or larger disposable non-food income.27 Figure S.28 Cambodia health financing and reliance on OOP expenditures, 2000–30 Panel A. Volume of health financing Panel B. Overreliance on OOP 120 80 70 Share of OOP over CHE (%) 100 Consistent 2020 US$ 60 80 50 60 40 30 40 20 20 10 0 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 250 500 1,000 2,500 10,000 35,000 100,000 GNI per capita, US$ General taxation External (via government) External (non-government) SHI OOP VHI Other 27 WHO 2015. CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 45 CHAPTER 2 Special Focus from Spending More to Spending Better – Toward Improved Human Development Outcomes Against the backdrop of a declining MoH Despite the improvement in health outcomes, budget (unrelated to COVID-19), low utilization Cambodia lags behind most of its ASEAN of public facilities, and a preference for private peers in life expectancy and child mortality sector services, which contribute to high out-of- rates (figure S.30, panels A and B). Over the pocket expenditure, Cambodia has significantly last two decades, life expectancy increased from improved health outcomes over the last 57 years in 2010 to 68 years in 2019. However, two decades. Cambodia has seen substantial Cambodia’s life expectancy was higher than increases in immunization coverage and declines only Lao PDR, but remained lower than in the in unvaccinated children (figure S.29, panel A). rest of its ASEAN peer countries. In addition, It has also seen large reductions in childhood Cambodia’s infant and under-five mortality rate mortality, with under-five mortality dropping was around three times higher than in Thailand from 124 per 1,000 births in 2000 to 16 in the and around one-third higher than in Vietnam. 2021–22 health survey (figure S.29, panel B). Figure S.29 Trends in immunization coverage and childhood mortality Panel A. Immunization coverage, Panel B. Childhood mortality, 2000–2021/22 2000–2021/22 Percentage of children age 12-23 months 124 79 76 Under-5 mortality Fully vaccinated 73 67 (basic antigens) 95 83 54 66 40 Infant mortality 35 22 45 37 No vaccinations 28 27 28 16 7 4 2 3 Neonatal mortality 18 12 8 2000 2005 2010 2014 2021-22 2000 2005 2010 2014 2021-22 CDHS CDHS Source: Cambodia Demographic and Health Survey (CDHS) 2021-22 Key Indicators Report, June 2022. Figure S.30 Life expectancy and child mortality rates, Cambodia compared to ASEAN peers Panel A. Life expectancy compared to Panel B. Child mortality rate compared to regional peers regional peers, 2020 90 50 40 80 30 70 20 60 10 50 0 2010 2015 2019 La dia M DR Vi ar m ru nd Ph alam In ines M sia ng a e or Si ysi na nm Da aila ne bo ap P Brunei Darussalam Cambodia p a et ss o do i l ip al ya m T h Ca EAP (exclude high income) Indonesia Low and middle income Lao PDR ei un Malaysia Myanmar Br Philippines Singapore Mortality rate, infant (per 1,000 live births) Thailand Vietnam Mortality rate, under-5 (per 1,000 live births) Source: World Bank Development Indicators, 2022. 46 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY CHAPTER 2 Special Focus from Spending More to Spending Better – Toward Improved Human Development Outcomes The disparity in health outcomes in rural and the poorest and richest in infant mortality urban areas and among wealth quintiles is and under-five mortality persists. In 2021, the likely to remain a challenge. Between 2005 and poorest infant mortality and under-five mortality 2021, infant and under-five mortality for urban rates were, respectively, 16 deaths per 1,000 live and rural areas significantly declined, but the births and 21 deaths per 1,000 live births, higher urban and rural gap remained. Infant mortality than the richest infant mortality and under- and under-five mortality in rural areas were, five mortality (figure S.32). The evaluation of respectively, 7 and 9 deaths per 1,000 live births, targeting quality is hindered by data availability higher than in urban areas by 2021 (figure S.31). constraints, which prevent the inclusion of more The richest and poorest gaps in infant mortality up-to-date health outcome data, as well as data and under-five mortality declined, as well, during at the district and commune levels to evaluate the same period. However, the gap between the equity of access within provinces. Figure S.31 Infant and under-5 mortality, urban compared to rural Panel A. Infant mortality rate and under-5 Panel B. Child mortality gap, infant and mortality rate, by residence areas (deaths per under-5, between urban and rural (deaths 1,000 live births), 2014–2021/22 per 1,000 live births), 2005–2021/22 120 50 Deaths per 1,000 live births Deaths per 1,000 live births 100 40 80 30 60 20 40 20 10 0 0 Urban Rural Urban Rural 2005 2010 2014 2021-22 Infant mortality Under-5 mortality Infant mortality gap Under-5 mortality gap 2005 2010 2014 2021-22 Sources: CDHS 2005, CDHS 2010, CDHS 2014, CDHS 2021-22 Note: CDHS=Cambodia Demographic and Health Survey, Infant mortality: the probability of dying between birth and the first birthday. Under-5 mortality: the probability of dying between birth and the fifth birthday. Child mortality gap=rural mortality rate-urban mortality rate. The higher the figure, the wider the gap. Figure S.32 Infant and under-5 mortality rates, richest compared to poorest quintile Panel A. Infant mortality rate and under-5 Panel B. Child mortality gap, infant and mortality rate, by wealth quintile (deaths per under-5, between poorest and richest (deaths 1,000 live births), 2014–2021/22 per 1,000 live births), 2005–2021/22 140 90 80 Deaths per 1,000 live births Deaths per 1,000 live births 120 70 100 60 80 50 60 40 30 40 20 20 10 0 0 Poorest Richest Poorest Richest 2005 2010 2014 2021-22 Infant mortality Under-5 mortality Infant mortality gap Under-5 mortality gap 2005 2010 2014 2021-22 Sources: CDHS 2005, CDHS 2010, CDHS 2014, CDHS 2021-22 Note: CDHS=Cambodia Demographic and Health Survey, Infant mortality: the probability of dying between birth and the first birthday. Under-5 mortality: the probability of dying between birth and the fifth birthday. Child mortality gap=rural mortality rate-urban mortality rate. The higher the figure, the wider the gap. CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 47 Conclusions and Recommendations The Government of Cambodia has been Improvement in human resource management able to enlarge fiscal space, maintain fiscal and the introduction of performance-based sustainability, and increase budget allocations management and accountability mechanisms to social sectors in the country. Thanks to could help improve technical efficiency and improved domestic revenue mobilization, the quality in public spending. The education sector government has been able to support civil continues to suffer from an uneven distribution service compensation reform and finance of teachers and an inability to address teacher COVID-19 relief packages. surpluses and shortages, impacting the quality of education. Without an accountability Social sector expenditure significantly framework in place, student learning outcomes increased from 4.6 percent of GDP in 2011 deteriorated despite the significant increase in to 10.5 percent in 2021, while spending in teacher salary. other sectors was stable. Key social sectors, including education and health, saw substantial Low utilization of public health facilities increases in budget allocations. The increase in and preference for private sector facilities, spending is broadly in line with the government which contributes to high out-of-pocket expenditure policy, which prioritized the social expenditure, reflects the limited effectiveness sector. Across the sectors, capital expenditures of public health policy and the general relied mainly on external funding. More perception of the quality of public health domestic financing for the capital budget is facilities. Major challenges for the sector necessary, as external funds for infrastructure include (1) health services quality remained have tended to decline. Improvement in public inadequate due to limited resources, specifically investment management is necessary to in terms of number of health professionals, achieve quality from public spending. diagnostics, and treatment; (2) inadequate capacity of the public health system to deal Expanded spending was significantly driven with diseases and illnesses; (3) investments in by salary increases for government officials health infrastructure, including technology and across the board. The wage bill as a share of information systems, remained limited; and (4) GDP increased over the last decade from 4.4 inappropriate healthcare-seeking behavior of the percent of GDP in 2011 to 7.2 percent in 2021. population, especially those in rural or remote Average monthly public sector pay is higher areas who delay seeking healthcare and who than private sector pay, reaching 1.50 million self-medicate.28 riels in 2019, compared to 1.25 million riels for the private sector. Without the introduction of The quality of spending needs to be improved. performance measurements, salary increases The outcomes from public spending in both the cannot ensure improved performance and, education and health sectors suggest a need for hence, quality, of spending. further improvement in both the effectiveness of investment and quality of outcomes. This will The government needs to address the gender require a stronger focus on strengthening both wage gap to improve gender equity in the allocative efficiency and operational efficiency. workforce. Female workers in the public sector suffer a significant gender wage gap in many segments of the public sector workforce. Cambodian females earn 94 percent of the wage of males in the private sector and 89 percent in the public sector. National Voluntary Review 2019. 28  48 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY Conclusions and Recommendations Table S.1 Summarizes these recommendations. Table S.1. Summary of recommendations Short-term recommendations Medium-term recommendation Sector Challenges (1–3 years) (3–5 years) Across all Linking • Revisit and refine Budget Strategic Plan • Fully implement performance-based sectors government to define realistic outcome indicators and budgeting spending with performance information that is comparable performance across the reporting period outcomes • Provide program directors greater authority over resources allocation and hold them accountable for performance outcomes • Review and restructure program budgets across the sector to support link between budget allocation and performance outcomes Introducing • Introduce performance-based management for • Introduce performance-based performance- mid-management level (general department management for all civil servants based and department level) across all sectors management and linking salary increase to performance Health Shifting from • Improve efficiency of public health spending • Revisit the benefits packages sector a (heavy) with more resources allocated for preventive included in current social health reliance on and curative care and less on health protection schemes to improve the out-of-pocket administration protection of these schemes to spending to • Improve availability of resources including avoid financial hardship increasing health professionals, diagnostics, and • Increase health coverage by building and treatment to encourage use of public health on existing social health protection efficiently facility schemes using public • Increase government health expenditure for spending on Health Equity Fund (HEF) service payments health Increasing • Rebalance resource allocation to point-of- • Integrate all existing social equitable service delivery at the district level, with a protection schemes, which includes access focus on poorer provinces with lagging health (i) establishing an administration to health outcomes and governance body to oversee a services for unified health protection scheme, the poor (ii) harmonizing health benefits packages of all health protection schemes, and (iii) ensuring sufficient budget to finance healthcare under the unified health scheme Education Improving • Improve information on teacher surpluses and • Delegate authority to schools sector human shortages for management purposes that meet school effectiveness resources • Improve teacher recruitment and deployment standards to hire contractual governance to ensure that newly recruited teachers will teachers and allocate resources stay at their assigned workplaces with low for it transferring rates • Introduce teacher licensing that • Introduce redundancy (termination) for requires renewal every specific teachers in subject matters not in demand number of years, and that requires and early retirement for those not teaching mandatory service in remote the minimum required number of hours locations Enhancing • Establish effective performance management • Fully implement school-based accountability systems that set out clear expectations and management and strengthen framework goals for teachers and education staff and accountability provide regular feedback and evaluations by • Enforce teacher standards the use of technology • Introduce performance-based salary raise and career promotion for teachers and education staff • Continue to build capacity of teachers CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19ECONOMICRECOVERY 49 Annex 1: Cambodia – Selected Indicators Selected Indicators* 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023F Income and Economic Growth GDP growth (annual %) 6.7 0.1 6.0 7.1 7.3 7.4 7.1 7.0 6.9 7.0 7.5 7.1 -3.1 3.0 5.2 5.5 GDP per capita growth 4.9 -1.4 4.4 5.5 5.8 5.8 5.7 5.5 5.5 5.6 6.2 5.8 -4.2 1.8 4.0 4.4 (annual %, real) GDP per capita (US$, 741.3 734.7 810.0 889.6 949.4 1030.1 1105.1 1183.2 1281.3 1397.0 1527.3 1667.8 1583.9 1624.7 1768.1 1913.6 nominal) Private Consumption 12.7 -0.2 8.8 10.4 4.6 5.8 4.5 9.4 5.8 3.7 6.8 5.9 -4.0 -0.7 9.5 20 growth (annual %) Gross Investment (% of 17.3 20.1 16.2 16.0 17.4 18.7 20.9 21.4 21.7 21.9 22.6 23.4 24.0 25.8 30.9 32.8 nominal GDP) Gross Investment - Public (% of nominal - - - - - - - - - - - - - - - - GDP)² Money and Prices Inflation, consumer prices (annual %, EOP 12.5 5.1 2.9 4.6 2.3 4.5 0.9 2.8 3.8 2.1 1.5 3.0 2.8 3.7 5.5 2.5 or MRV)¹ Inflation, consumer prices (annual %, period 12.3 3.1 2.6 5.5 3.0 2.9 3.9 1.2 3.0 2.9 2.5 1.9 2.9 2.8 5.5 2.5 average) Broad Money (% of GDP) 28.3 37.7 41.6 39.1 50.1 55.5 67.1 72.4 79.2 88.2 100.7 116.3 137.2 152.6 148.3 146.7 Domestic Credit to the Private Sector (% of 23.5 24.6 27.6 28.3 38.7 52.0 62.7 74.3 81.7 86.7 99.6 114.2 139.6 - - - GDP) 10 year interest rate - - - - - - - - - - - - - - - - (annual average)¹ Nominal Exchange Rate 4060.0 4140.0 4044.0 4016.0 4033.0 4027.0 4030.0 4025.0 4058.0 4062.0 4067.0 4070.0 4077.4 4100.0 4150.0 4110.0 (local currency per USD) Real Exchange Rate 91.3 90.8 98.0 94.3 93.3 92.6 94.9 100.0 101.9 101.8 98.5 99.2 99.2 92.7 95.7 87.0 Index (2015=100) Fical 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 23.8 22.0 23.2 23.5 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 28.8 29.1 27.9 29.9 Interest Payments (% 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 0.5 0.6 of GDP) Non-Interest 15.9 20.3 20.7 22.7 21.4 20.7 21.2 19.9 20.7 22.3 23.0 25.1 28.2 28.5 27.4 29.3 Expenditure (% of GDP) Overall Fiscal Balance 0.3 -4.6 -3.3 -5.4 -4.2 -3.2 -1.9 -0.5 -0.2 -0.8 0.4 1.5 -4.9 -7.0 -4.7 -6.4 (% of GDP) Primary Fiscal Balance 0.5 -4.4 -3.0 -5.1 -3.7 -2.5 -1.2 -0.2 0.2 -0.4 0.8 1.9 -4.3 -6.5 --4.2 -5.9 (% of GDP) General Government 27.8 29.1 28.7 29.7 31.6 31.3 31.8 31.2 29.1 30.3 28.3 28.1 33.9 35.2 33.7 35.6 Debt (% of GDP) External Public Debt (% 24.6 26.4 27.2 27.0 30.5 31.6 31.5 31.2 29.1 29.7 28.5 27.9 33.9 35.1 - - of GDP)² External Accounts Export growth, G&S 20.2 -24.4 22.9 11.4 16.0 16.8 10.3 7.5 9.0 9.4 12.3 8.5 2.1 11.2 31.9 19.0 (nominal US$, annual %) Import growth, G&S 11.3 -17.0 19.1 11.4 14.2 16.9 8.8 7.6 9.0 7.8 9.3 17.4 5.7 46.1 37.8 9.2 (nominal US$, annual %) Merchandise exports (% 49.4 33.9 38.3 38.8 41.6 44.6 45.4 45.4 45.5 45.2 46.0 46.0 51.8 62.8 70.2 71.8 of GDP) Merchandise imports (% 58.2 46.8 50.4 50.5 53.7 57.5 57.5 57.3 56.9 55.6 55.1 54.6 65.7 92.4 91.4 93.5 of GDP) Services, net (% of GDP) 6.5 6.2 6.8 6.3 7.3 7.8 7.7 7.5 7.0 7.0 7.4 1.8 4.1 -5.8 -26.9 -18.9 Current account balance (current US$ -622.3 -1120.4 -1165.3 -1309.3 -1390.7 -1489.3 -1899.7 -1680.6 -1756.5 -2140.5 -2180.1 -4107.7 -3221.0 -11492.8 -7798.4 -6256.3 millions) Current account -6.0 -10.8 -10.0 -10.1 -9.9 -9.6 -11.3 -9.2 -8.8 -9.7 -8.9 -15.2 -12.4 -42.6 -26.3 -19.3 balance (% of GDP) Foreign Direct Investment, net inflows 7.6 8.8 11.8 11.8 14.0 13.0 10.6 9.5 12.0 12.1 12.6 13.2 13.5 12.6 -12.6 -13.5 (% of GDP) Multilateral debt (% of - - - - - - - - - - - - - - - - total external debt)² 50 CAMBODIA ECONOMIC UPDATE MAY 2023 | POST-COVID-19 ECONOMIC RECOVERY Annex 1: Cambodia – Selected Indicators Selected Indicators* 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023F Population, Employment and Poverty Population, total 13.9 14.2 14.4 14.6 14.8 15.0 15.2 15.4 15.6 15.8 16.0 16.2 16.4 16.6 16.8 16.9 (millions) Population Growth 1.7 1.5 1.5 1.5 1.5 1.4 1.4 1.4 1.3 1.3 1.2 1.1 1.2 1.2 1.1 1.1 (annual %) Unemployment Rate² 0.8 0.6 0.8 0.6 0.5 0.4 0.7 0.4 0.7 0.1 0.1 0.1 0.3 0.6 - - Inequality - Gini - - - - - - - - - - - - - - - - Coefficient2 Life Expectancy 2 66.5 67.4 67.7 68.4 68.9 69.3 69.7 69.9 70.2 70.5 70.6 70.7 70.4 - - - Other GDP (current LCU, 41968385.4 43056731.7 47047985.2 52068692.7 56616800.5 62219524.1 67740449.6 73422701.6 81241866.0 89830524.8 99544274.8 110014048.2 105891753.0 110505915.9 123036850.5 133448611.2 millions) GDP (current US$, 10337.0 10400.2 11634.0 12965.3 14038.4 15450.6 16809.0 18241.7 20020.2 22114.9 24476.1 27030.5 25970.2 26952.7 29647.4 32469.3 millions) GDP per capita LCU 2055920.0 2026907.2 2116702.2 2233632.6 2362497.2 2500274.8 2641674.7 2787803.8 2941584.8 3106427.6 3297922.6 3490805.5 3343715.1 3405004.0 3542598.8 3688869.9 (real) Human Development 145 145 147 148 147 147 146 148 148 147 148 147 148 146 - - Index Ranking³ CPIA (overall rating)2 3.3 3.3 3.4 3.4 3.5 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.5 - - Economic Management2 3.8 3.8 4.0 3.8 3.8 3.8 3.8 4.0 4.0 4.0 4.2 4.2 4.2 4.2 - - Structural Policies2 3.3 3.3 3.3 3.5 3.7 3.7 3.7 3.5 3.5 3.3 3.3 3.3 3.3 3.5 - - Policies for Social 3.3 3.3 3.4 3.5 3.5 3.4 3.4 3.4 3.4 3.4 3.4 3.5 3.5 3.6 - - Inclusion and Equity2 Public Sector Management and 2.7 2.7 2.7 2.8 2.8 2.8 2.8 2.7 2.7 2.7 2.6 2.6 2.7 2.8 - - Institutions2 Notes: ".." indicates not available. 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