Financing Deficit is a Strain on Gov’t Savings, ADB Says

The government must cease paying for its budget deficit with Na­tional Bank deposits by next year to ensure economic stability, the Asian Development Bank’s senior country economist said yesterday.

Speaking at a press conference in Phnom Penh on the bank’s periodic economic forecast released last week, Eric Sidgwick said the government had already spent a quarter of its total savings within the banking system in 2009 as part of its widened fiscal stance during the course of the economic crisis, a decision he described as “appropriate” during a recession.

“We would hope by 2011…the government will resume a more prudent fiscal stance as it starts to accumulate savings again,” said Mr Sidgwick. “There is still some do­mes­tic financing of the deficit and that in 2011 will [have to] disappear.”

The government drew down on about 627 billion riel, or $152.9 million, from deposits in the banking system in 2009, amounting to about 1.4 percent of GDP.

Although this year’s budget suggests some consolidation in fiscal spending—the deficit was 5.9 percent in 2009 and will shrink to 5.2 percent this year, according the ADB—domestic financing in 2010 will still account for about 0.6 percent of GDP this year.

“At some point that has to stop,” Mr Sidgwick said, adding that if government deposits are depleted they will not be available when needed in the future.

Up until 2009, the government financed its budget deficit by using donor money and has avoided drawing down on bank deposits. Other methods of financing the deficit such as printing money are not an option in Cambodia due to its heavily dollarized economy.

Last week, the ADB projected eco­nomic growth to reach 4.5 percent in 2010, a forecast shared by the World Bank, which put economic growth at 4.4 percent.

ADB Country Director Putu Ka­m­a­yana also said yesterday that developing countries in Asia would have to adjust their policies “in terms of monetary exchange rate and fiscal policies.”

Mr Sidgwick said the major challenges for Cambodia’s economy moving forward would remain consistent with before the global economic crisis.

Whereas growth projections in Asia are strong, the outlook in Eur­ope and the US is less so, spelling some uncertainty for Cambodia’s economy, as most exports go to the US and Europe.

“Cambodia is not yet really integrated into the Asia markets, and it is still heavily dependent on the Euro­­pean and US markets,” Mr Sidg­wick said. “This means new products for export and new markets.”

He also said that while most of the policies laid out by the government on paper “make good sense,” “the key challenge for the government is to actually implement them.”

Pushing forward with the reform agenda will require ministries to coordinate at a more efficient level, he said. “In some cases this is still a difficult proposition.”

Officials at the Ministry of Fi­nance could not be reached, while CPP lawmaker Cheam Yeap, chairman of the National Assem­bly commission on banking and fi­nance, said he was too busy to talk.

Still, in a move to diversify Cam­bodia’s economic base, the Minis­try of Commerce an­nounc­ed yes­ter­day a range of policies under the government’s committee on Trade Develop­ment and Trade Re­lated Investment.

A total of 11 projects that are part of the so-called Trade Development Support Program—a fund of $12.6 million financed by the European Un­ion, the Danish International Development Agen­cy and the UN In­dustrial Devel­opment Organ­iza­tion—will aim to enhance the ability of the Com­merce Ministry and spe­cial economic zones to regulate rules of origin, facilitate trade links in the region and support a dialogue on minimum wage for garment workers. A project has also been adopted to stamp out illegal ex­ports through improved customs.

“Remarkable challenges related to regulation, finance, management ca­pacity, staff incentive scheme[s]…have emerged,” Com­merce Minister Cham Pra­sidh said in a statement yesterday, adding that Cam­bodia still needs to become more competitive and continue to bol­ster trade links.

Mao Thora, secretary of state for the Ministry of Commerce, said the immediate goals for the government would be to concentrate on wi­dening the markets available to Cambodia’s agricultural products, especially to regional countries like Vietnam, Thailand and China.