Economic experts from around the region urged the Cambodian government yesterday to introduce more social polices for the poor in order to protect the country’s most vulnerable groups from any further shocks to the economy.
Cambodia’s economy, which development agencies say contracted by more than two percent last year, is currently showing signs of a recovery. But efforts to reduce poverty levels are still under threat with the future of Cambodia’s main engines of growth, the garment industry and construction, still uncertain.
Providing social security is, therefore, more urgent than ever, experts said at a workshop in Phnom Penh yesterday organized by the UN and the Ministry of Economy and Finance.
“The economic downturn threatened Cambodia’s progress in reducing poverty, which is the first of the Millennium Development Goals,” said Douglas Broderick, UN resident coordinator in Cambodia, noting that around 4 million people still live in poverty in Cambodia.
“We remain concerned about the effects that the current global economic crisis will have on achieving these Goals,” Mr Broderick said in a speech, noting that “investment in social safety nets now will have positive effects for Cambodia long after Cambodia’s economy has fully recovered.”
Social security measures, he said, could include conditional cash payments to poor families, comprehensive civil service pensions and health insurance and food-for-work programs.
Though not specifically addressing any concrete plans to implement new social policies, Finance Minister Keat Chhon did say there was a need for economic reform on the statistics front.
Mr Chhon said that better insight into how the domestic economy is performing through more reliable data analysis would help the country’s overall.
“I would like to emphasize the need for stronger national capacity to conduct economic and financial surveillance,” Mr Chhon said in a speech to the audience of local and regional government officials and staff of international organizations.
Mr Chhon also said that the government must increase spending while not increasing the government’s debt burden.
“A large fiscal space and moderate public debt are important to maintain confidence in medium-term fiscal sustainability,” the minister said.
Cambodia was forced to spend larger amounts during the course of the financial crisis, sending last year’s budget deficit up to nearly six percent of GDP compared to some 3 percent prior to the global economic meltdown.
Despite desires to increase government spending to pay for social safety nets, experts say Cambodia could find generating revenues an arduous task with a rebound in foreign investment still uncertain and the country’s tax regime still proving insufficient.
The International Monetary Fund and Asian Development Bank have consistently warned the government that its budget deficit is too high and must be downscaled in order to avoid inflationary pressures and a reduction in national reserves.
However Nagesh Kumar, chief economist at the UN Economic and Social Commission for Asia and the Pacific, said that government spending should remain robust so that there is enough fiscal space to pay for the proposed social safety net measures.
“In an expanding economy generally speaking there is greater fiscal space. So we should not fall prey to this policy” of reduced spending, Mr Kumar said in an interview.
“Use it [government spending] this way because if we try to reduce it, it could bring down the growth momentum,” he said, adding that pulling back from spending now “could also fail to leave any funds for social protection.”
He added that there is still a large amount of domestic savings still available to the government.
“There is a lot of fiscal space that remains to be utilized or exploited,” he added.
Qimiao Fan, country manager of the World Bank’s office in Cambodia agreed with Mr Kumar’s call for continued government spending.
“For a low income country like Cambodia where the share of fiscal revenue [as a share] of GDP is still extremely low, you still have significant space to further increase your fiscal revenue,” Mr Fan said, pointing out that “both foreign direct investment and official development aid are likely to continue to be impacted somewhat negatively” from the global financial crisis.
As of yet the government’s stimulus spending last year – which amounted to some $152.9 million – has not resulted in any major inflationary pressures.
Mr Fan also said that Cambodia could benefit from China’s continued growth, estimated at 11 percent this year by the IMF. As labor costs become more expensive in China, manufacturers will eye up Cambodia as a cheaper base for production, Mr Fan said.
Moreover, China could also be a destination for Cambodia exports, he said.
“China is a significant importer of food and particularly of grain and rice.”
But with much still left to accomplish in order to take advantage of new overseas markets, Mr Fan said that better social policies were needed to act as a security blanket against any further shocks in the economy.
“Social protection during a crisis is important not just in terms of protecting the hard earned gains in poverty reduction…but it’s also very important for countries to be better able to position themselves for a speedy recovery once the crisis is over,” he said.
Larry Strange, executive director of the Cambodia Development Research Institute said at yesterday’s conference that growth was necessary for poverty alleviation.
“The feasibility and pace of a return to a growth economy in Cambodia will have a very significant impact on any prospects of further poverty reduction,” Mr Strange said.
In an assessment of the effects of the financial crisis on the poor carried out in March with the World Bank, he said findings showed “a steady return to growth” in the garment and tourism sectors and some minor signs of recovery in the construction sector.
But “we saw a negative effect in unskilled construction workers, cyclo drivers, restaurant workers [and] migrant workers,” he said.