Rosy Predictions for Economy, With Many Caveats

After another year of double-digit GDP growth in 2006, Cambodia’s economy is predicted to continue growing strongly in 2007 and in the following years, national and international officials said Feb 23.

Hang Chuon Naron, Finance Ministry secretary-general, said GDP was expected to grow by 9 percent in 2007 and an additional 7 to 8 percent per year in 2008 and 2009.

Speaking at the “2007 Cambodia Outlook Conference” in Phnom Penh, Hang Chuon Naron presented statistics predicting that growth from 2010 to 2015 would be be­tween 9 to 10 percent per an­num. This growth will be sustained in part by the production of oil, which will begin flowing in 2010, he said.

Hang Chuon Naron cautioned, however, that Cambodia has to diversify its sources of growth to avoid being too reliant on the narrow sector of industries propelling GDP—namely the garment industry, tourism and construction.

The conference was organized by the Cambodia Development Resource Institute and ANZ Royal Bank.

John Nelmes, resident representative for the International Mone­tary Fund, said his organization was also predicting 9 percent GDP growth for 2007 and 7 to 8 percent growth in the medium term.

Nelmes said Cambodia’s economic growth tends to be heavily influenced by the growth of the world and regional economies, which he said are predicted to grow at 5 and 9 percent respectively in 2007.

“The environment for Cambodia this year is going to be one of continued support and continued strength, and this is good news for 2007 for Cambodia,” he told the conference.

Nelmes presented statistics showing that the government’s spending this year is expected to increase from 13.1 percent of GDP to 13.9 percent. This would mark the first such increase since 2002.

“This is a good start because Cambodia does need to spend more of its public finances on infrastructure…health and education,” he said.

Nelmes added that 2006 saw a 50 percent jump in lending by banks to the private sector. Increas­ing public confidence in the banking system means that this trend is likely to continue, he said.

But the threat of competition from Vietnam is going to pose challenges for Cambodia in 2007, Nelmes said. He noted that Viet­nam’s entry to the World Trade Organization last month has meant the lifting of quotas that had limited its exports to the US. As a result, Cambodia will have to compete directly with its neighbor on 88 percent of products exported to the US, Nelmes said.

There will likely be further competition in 2008 when US and European Union safeguards on Chinese exports are set to be lifted, he added.

Douglas Gardner, UN Develop­ment Program resident coordinator, said the Cambodian government could, conservatively, take in roughly $1 billion per year in oil revenue within a couple of years. A UNDP statement distributed at the conference put the possible annual government revenue at $1.7 billion from offshore Block A alone, based on a $60 per barrel price and the preliminary estimate of 700 million barrels per year issued last year.

US Ambassador Joseph Musso­meli noted that this was over three times the amount of official development assistance Cambodia received in 2005.

Gardner warned that if used unwisely, the revenue would do little to help Cambodia, noting that six out of 10 of Africa’s most indebted states are mineral exporters.

“It shows that it’s very easy to borrow against expected revenues and at the end of the day you may end up heavily in debt,” Gardner said.

Mussomeli said a sudden influx of oil revenue would not make the government any less dependent on donor assistance to make sure that the revenue is used to benefit the poorer elements of society.

“I think it will be wonderful if actually we lose our influence,” Mussomeli said of the donor community. “Because that could only happen if they’re not only getting the revenue, but using it appropriately.”

Te Duong Tara, secretary-general of the Cambodian National Petroleum Authority, cautioned that the size of Cambodia’s oil reserves is not yet known.

Nisha Agrawal, country manager for the World Bank, said the growth of the Cambodian economy as a whole was impressive, but added that it is driving inequality.

“We are celebrating the 10 percent growth of last year and this year and the coming year,” she said. “But we must ask the question: whose growth?”

Inequality in the distribution of wealth is far higher in Cambodia than neighboring countries, Agra­­wal said, adding that such inequality is very different from other developing countries in East Asia.

“Cambodia is at a very early stage of development with very high levels of inequality,” she said.

Agrawal pointed to the policy of granting large economic land concessions as one factor driving inequality and slowing poverty reduction.

Between 1992 and 2006, the government granted 70 year-leases to 96 private companies, 57 of which are currently occupying over some 1 million hectares of land, she told the conference.

“There is a belief in Cambodia that large farms are more competitive and more productive and the country can only grow with large farms,” she said. “That is a myth—that is not the experience from any country in East Asia,” she said.

Agrawal added that in Vietnam, farms tend to be smaller but are three times more productive and spur growth that reduces poverty more because the money goes directly to small farmers.

In reality, only 10 economic land concessions are really operational in Cambodia, with the rest being held for land speculation purposes, Agrawal said.

“That is not a good use of Cambodia’s land for either poverty reduction or growth or anything. And I can’t see how the government can justify this, frankly,” she said.

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