floods as well as the economic slowdown in Europe and the US have prompted the World Bank to lower its outlook for Cambodia’s economic growth this year to 6 percent, down from a previous projection of 6.8 percent.
In its economic update for the region released yesterday, the World Bank said that the revised gross domestic product figure for Cambodia was largely due to the blow suffered by the agricultural sector, which accounts for a third of the country’s economy.
“The flood damaged hundreds of thousands of hectares of rice seedlings, paddy rice plantations and other agricultural crops,” the World Bank said in the report.
Originally projected to grow by nearly 4 percent, the agriculture sector is now expected to increase by just 1.5 percent this year. The report also warned that its forecast is based “on the assumption that floods will recede fast enough to allow some flooded areas to be replanted quickly.”
In October, Finance Minister Keat Chhon reduced the government’s GDP projection to 6 percent, down from a previous estimate of 7 percent.
With the country’s rice production expected to drop due to the flooding, the World Bank said inflation is predicted to reach 7.5 percent by the end of the year, which would put pressure on spending power in rural areas. On top of the damage inflicted by the floods, the the World Bank said garment exports – which grew 36 percent in the first six months of this year compared to the same period last year – could slow due to weakness in the economies of the Euro zone and the US.
“Growth in the second half of 2011 is expected to slow due to the recent destructive floods and the anticipated slowdown in EU and US demand,” the report said.
Enrique Aldaz-Carroll, senior country economist at the World Bank, said the modest GDP adjustment of 0.8 percent was due to the large increase in garment and footwear exports to the US and the EU in the first half of 2011. Duty free access for Cambodian products to the EU that came into force in January has seen garment exports to the 27-member trade bloc jump by 61 percent in the first half of 2011, compared to the same period in 2010.
Hout Chea, economist for the World Bank’s Poverty Reduction and Economic Management Unit, said the effects of the flooding on inflation was expected to kick in soon.
“We expect to feel the impact in the next three months,” said Mr Chea. Although the government has tried to keep inflation at 5 percent, Mr Chea said that the World Bank’s projected inflation of 7.5 percent is still manageable, especially when compared to Vietnam’s 23 percent inflation.
Chan Sophal, president of the Cambodian Economic Association, warned that the effects of the flooding would have an negative impact on incomes in rural communities.
“They have less income or no income compared to last year,” said Mr Sophal. “There are a lot more poor households in the flooded areas.”
The UN estimates that a total of 1.2 million Cambodians have been affected by the flooding.
According to the World Bank report, Cambodia’s construction sector has remained “subdued” after suffering negative growth last year.
“Nationwide, project approvals were stagnant over the first half of 2011. This slowdown is reflected in the 6 percent decline of imports of constructions materials during the same period,” the report said.
Still, the World Bank projected that foreign direct investment is expected to increase by 15 percent in 2011 to about $890 million, compared to $774 million in 2010, and that credit to the private sector had grown by 30 percent by June compared to the same period a year earlier.