The International Monetary Fund said Friday that Cambodia’s economy is expected to grow as much as 5 percent this year, with slightly higher annual growth projected for the following years, but cautioned that the country continues to face significant risks due to the fragility of the global 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 about 6 to 7 percent,” said Olaf Unteroberdoerster, senior economist for the IMF’s Asia and Pacific department.
Double-digit growth in garment exports, tourist arrivals and growth in agriculture will account for the continuing expansion, he said.
“There are risks to this outlook; the global recovery is far from being assured as…the Euro-area crisis in May has made clear,” he said, adding that further renewed financial instability could hurt exports in Asia. “This in turn could have an adverse impact on the recovery in Cambodia.”
A “sluggish” construction sector will keep the GDP from reaching its pre-crisis heights, he said. A late rainy season could also hurt agricultural growth this year, he warned.
In June the World Bank predicted 4.8 percent growth for 2010.
Discussions with the government focused partly 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 about 5 to 7 percent of GDP in taxes less than a country would 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.
“[Cambodia] needs to have more roads. It needs a better irrigation system for agriculture 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 whether this is the single biggest problem or whether this would account for 50 percent of the loss in revenue,” he said, adding that the government has made strides but can extract “substantially more revenue though improved administration.” He said the passage of the anticorruption law could help.
Finance Ministry Secretary of State Chea Peng Chheang said he did not participate in the consultation. 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 grown 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 maing revenue, and making public expenditures,” he said.