IMF Says GDP Growth Facing Continuing Risks

The International Monetary Fund said Friday that the country’s economy is expected to grow as much as 5 percent this year, with slightly higher annual growth in the following years, though significant risks for Cambodia exist due to the fragility of the world economic recovery.

The estimate follows a two-week consultation between the government and the IMF to discuss ways the government can grow the economy, which some economists say is still narrowly based and especially vulnerable to external shocks.

“We expect that over the median term from 2011 to 2012 and onward, growth will return to its potential which the estimate is 6 to 7 percent,” said Olaf Unteroberdoerster, the IMF’s senior economist for the Asia and Pacific department.

Double-digit growth in garment exports, tourist arrivals, and agriculture will account for the continuing growth, he said.

“There are risks to this outlook, the global recovery is far from being assured as recent Euro-area crisis in May has made clear,” he said, adding that renewed instability could hurt exports in Asia. “This in turn could have an adverse impact on the recovery in Cambodia.”

The prediction follows last year’s decline in growth of 2 percent, and the prediction is several percent lower than the double-digit growth Cambodia enjoyed for ten years preceding the crisis.

A “sluggish” construction sector will keep the GDP from reaching its pre-crisis heights, he said. A late rainy season could also hurt agriculture growth this year, he warned.

In June the World Bank predicted 5 percent growth for 2010.

Discussions with the government focused on the need to increase tax collection to improve education and infrastructure thereby strengthening the economy, he said. Corruption and the government not fully exploiting the tax law continue to keep tax revenues low, Mr Unteroberdoerster said.

“At the moment, Cambodia collects 5 to 7 percent of GDP in taxes less than a country could normally do sharing the same characteristics of Cambodia,” he said. He said improved tax collection would improve debt sustainability but also help fund areas in need of economic development.

“It needs to have more roads. It needs a better irrigation system to enhance productivity. It needs to have better, more reliable electricity for companies and manufacturing to be competitive on the world market. And it needs a skilled labor force,” he said.

Mr Unteroberdoerster said it’s difficult to determine how large of a role corruption plays in keeping down tax revenue.

“It’s a big problem, but I cannot tell you that it’s the single biggest problem or that it would account for 50 percent of the loss in revenue,” he said, adding that government has made strides but can extract “substantially more revenue though improved administration.” He said the passage of the anti-corruption law could help.

Finance Ministry Secretary of State Chea Peng Chheang said he did not participate in the consultation, while several other ministry officials could not be reached for comment.

In Channy, president of Acleda Bank, said he has few doubts about the recovery, noting that sector-wide loans have increased 20 percent.

“I see the economy comes back already,” he said noting that more Asian investors will help keep Cambodia less vulnerable to fluctuations in western economies. “It comes through the growth in the banking sector and there are many new investors from Vietnam, China and from South Korea,” he said.

Ken Loo, Secretary General for the Garment Manufacturers Association in Cambodia, said that garment export growth in the first seven months of the year may not be sustained.

“The growth has not recovered from the decline we experienced in 09. Even if you were to compare 08 and this year you will see a decline of less than five percent,” he said.

He said some of the growth earlier this year was due to expectations that cotton prices would rise which caused a spike in orders.

Kang Chandararot, executive director of the Cambodia Institute of Development Study, said Cambodia has continued to diversify its agriculture and garment export markets since the crisis began, decreasing its vulnerability to the global marketplace.

“The risk that our economy will not recover is very low,” he said. Mr Chandararot agreed that better tax collection is key to improving the economy.

“Collection will be the central point for the government policy in making revenue, and making public expenditures,” he said.

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