Call to broaden growth sources

One of the challenges for Cambodia going forward is broadening its sources of growth, said John Nelmes, senior Resident representative of IMF (International Monetary Fund) Cambodia, in a recent interview.

"Growth has been very strong, but it has been based narrowly on a few sectors - garment exports, agriculture and tourism - which account for roughly half of the country's growth," Nelmes explained.

The country needs to broaden its growth sources because having a narrow base leaves it susceptible to economic shocks, and also does not provide the type of broad employment opportunities that the government and workforce need.

Signs of maturity

"While the Cambodian economy is still very young, we're starting to see signs of maturity. We are already starting to see the financial sector grow extremely strong. In fact when you look at some of the data, it shows that the sector is growing at about 50 percent year-on-year, which is incredibly fast growth for the financial sector. Furthermore, the insurance sector, as part of the financial sector, is also starting to boom here," Nelmes noted.

Cambodia is a small, open economy and a World Trade Organization (WTO) member. In fact it was one of the first less-developed countries to become a WTO member. It needs to look at exports as one of its key areas where it wants to diversify, Nelmes pointed out.

"What the country wants to put in place is the basic fundamental groundwork - the playing field that allows the private sector to play an increasing role in the development of the country," Nelmes advised.

Unique selling points

Cambodia has positives as well as negatives, and the IMF always tries to give a balanced view, according to Nelmes.

It has got a very young and very large labor force, which has been very beneficial for the garment sector.

Cambodia is geographically well positioned, located in the middle of Asia in a very dynamic region. It has adopted very open and very forward-looking trade policies by joining the WTO and opening itself up to competition. It is really putting emphasis on the need for the country to remain competitive, said Nelmes.

He said one of the most important actions of the Cambodian government has been maintaining a very broad degree of macro-economic stability and very prudent macro-economic policies, specifically with regard to the budget and monetary policy, which have been well implemented.

"They are facing challenges on both sides as well. But the fact that they've had budget deficits that have been relatively easily financed through a concessional form of financing, and that they have not accessed domestic financing from the banking system, means two things: one is that the banks have been able to turn around and increase their lending to the private sector, and they have been doing that very strongly; the second is that overall inflation has remained low," Nelmes explained.

At the end of 2006, inflation was at about 3 percent - similar to the level in a developed country. At the end of last year, inflation was 10.8 percent, up sharply from 2006. The increase reflects higher international oil and food prices and the decline in the dollar, as well as signs that strong domestic demand is starting to contribute to inflation pressures.

This is crucial for a country like Cambodia, where inflation can really undermine the existence of the poor, because they don't have the capacity to protect themselves, noted Nelmes.

"Because the people have not had to worry about double-digit inflation, they've been able to improve productivity. Businesses have had more certainty of investing, and that has contributed significantly to the fact that Cambodia has had 15 percent growth in 2005 and an average of 9 percent since 2000," he added.

Broad and deep reform

Nelmes praised the financial reform efforts of the Cambodian Ministry of Economy and Finance and noted that IMF has committed itself to assisting in this reform.

However, he said there are two areas where the ministry faces significant challenges. "One is in public financial management reforms."

The government, especially the ministry, has embarked on very broad and deep reforms in the management of public finances. IMF has been involved in assisting, as well as designing and providing technical aid, in the implementation of the reforms.

The reforms, launched in December 2004, aim to make the budget system more credible, accountable and transparent.

"All in all I think it was broadly successful. And the idea here is that they used public money in a more transparent and more efficient way," Nelmes said.

The second challenge, Nelmes said, is maintaining a prudent budget.

Budgetary policy has been well implemented overall. Cambodia has maintained fiscal deficits that can be financed through concessional forms of financing.

"One of the challenges to continue with that is to raise government revenue so that they can direct the money toward spending on health, education, water and sanitation, which will help both reduce poverty as well as strengthen the quality of the labor force. They also need to spend more on civil servants' salaries to help address the very low pay, which has implications for improving governance and reducing corruption, such as getting incentives right. And they also need to spend more on infrastructure - on roads, on transportation, on energy for power supply, and areas like that," noted Nelmes.

Monetary policies

Commenting on the role of the National Bank of Cambodia (NBC), the nation's central bank, Nelmes said one of the challenges is to implement monetary policies that help inflation remain in the low single digit.

"The Cambodian economy is highly dollarized - about 95 percent dollarized. That in itself presents challenges and also benefits," Nelmes noted.

He said the main benefit is that it has effectively adopted the monetary policy of the United States, which is a very stable, prudent monetary policy, because it is using the US dollar. And in effect that has led to single digit inflation outcome.

Over the long term, Nelmes said, the NBC wants to increase the use of the local currency in Cambodia, adding that: "It is an extremely challenging endeavor to do that because they have to get people to have confidence in the currency and that it will hold its value. So it is a very long and challenging process, but over the long term we believe it would be beneficial to do so. But remember, this is a period of decades."

He said the other challenge that the NBC faces, and where IMF has also been providing assistance, is improving its capacity to provide supervision of the financial system.

"The financial system and the banks are growing very, very quickly - at a rate of about 50 percent per year, or even higher. That's incredible growth in the financial system. When you have growth rates like that in anything, it just raises challenges because the banking sector needs to be supervised very closely. And it is developing very quickly, so the NBC has got to be quick on its feet to keep up," Nelmes pointed out.

(China Daily 04/10/2008 page28)