World Bank Economists Grilled Over Pervasive Rural Debt

The head of Transparency International Cambodia used the release of a World Bank economic report yesterday to press the lender’s economists on rural indebtedness and their claim that the country’s strong GDP growth was helping the country’s poor.

Preap Kol, executive director of the NGO focused on corruption, said there was a disconnect between its rosy economic projections of GDP growth and the mounting struggles of the rural poor saddled with increasing debt.

“Economists, experts, help me understand,” Mr. Kol said during a question-and-answer session following a presentation of the semiannual report. “I’m trying to make sense of the report…and the reality Cambodia is facing.”

Mr. Kol asked why the majority of Cambodian rural households are indebted, despite Cambodia’s “brilliant” economic growth of nearly 7 percent.

“How will this 6.9 percent help the majority of the Cambodian people?” he asked.

The World Bank report says rural households made up 88 percent of all indebted households in 2015, up from 80 percent in 2009, while the proportion of those loans going to “productive purposes,” or business investments, declined over the same period.

World Bank senior economist Sodeth Ly replied that Cambodia’s data for debt-income ratios were in fact “not very bad…not very dangerous.”

The bank’s senior country economist, Miguel Sanchez Martin, said in an interview after the session that Mr. Kol was raising micro-level observations, whereas the macroeconomic data from the National Bank of Cambodia and household surveys showed that inequality and debt in Cambodia were not at crisis levels.

But the World Bank’s conclusion relied only on official indebtedness data, Mr. Kol said in a later email, countering that it ignored unregistered loans given through “informal money lending sources,” which, combined with official loans, meant rural debt was “actually quite high and concerning.”

Informal money lenders were raised in the World Bank’s report as having the potential to thrive following government intervention in the microfinance sector.

After a major public awareness campaign to spread the message that microfinance institutions (MFIs)—the lenders at the heart of rural indebtedness—were not part of the government, the National Bank of Cambodia issued a prakas in March banning them from charging more than 18 percent annualized interest on loans.

According to the World Bank, that market-distorting policy could push registered MFIs out of the market, making room for informal money lenders, “among which responsible lending practices are not observed.”

Overall, the World Bank’s report paints a positive picture of Cambodia’s poverty reduction efforts, which it says were driven in recent years by the rural poor’s diversification from solely agricultural livelihoods.

The report also focuses on broad economic trends and provides details on Cambodia’s strong growth rate, which is expected to hover at about 6.9 percent through the end of next year.

That forecast comes de- spite a slowing of growth in the garment sector attributed to a stronger U.S. dollar, which makes Cambodia’s exports to its main destination, the E.U., relatively more expensive.

The flipside of the strong dollar, according to Mr. Sanchez Martin, is that Cambodia’s construction and real-estate sector—largely unaffected by U.S. dollar appreciation—was increasing as a proportion of the country’s total economic growth.

Mr. Sanchez Martin and Mr. Ly said they expected that sector’s growth to continue for at least the next few years, regardless of the domestic demand for new housing, because most of the funding is coming from abroad—particularly from China and South Korea.

“At some point we expect it to slow down,” Mr. Sanchez Martin said, adding that so far the bank had not seen indications of a bubble or decline in the construction sector.

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