Fiscal Policy Must Be Managed Well to Sustain Growth
The World Bank increased its GDP forecast for Cambodia to 4.8 percent yesterday up from 4.4 percent in April, though warned that how the government manages its fiscal policy over coming months will largely dictate how the economy fares into 2012.
According to the World Bank’s periodic global economic forecast, fiscal balances in the East Asian post-crisis era “will present a challenge for policymakers and play a large role in shaping the outlook to 2012.”
The report also said that the sovereign debt crisis in Europe could also have a negative effect on East Asia’s export market as demand dries up – around 30 percent of all Cambodia’s exports, which are predominately garments, go to the EU.
In 2009, increased government spending brought the budget deficit up to 5.9 percent of GDP. And although this year’s budget suggests some consolidation in fiscal spending, it is still high enough that the government will have to draw down on its domestic reserves.
“There are a number of risks associated with this,” John Nelmes, resident representative for the International Monetary Fund in Cambodia, wrote in an e-mail yesterday.
One risk of sustained government spending is if the injection of riel into the economy causes the exchange rate to depreciate and consequently leads to a rise in inflation. If the National Bank of Cambodia looks to prop up the national currency by purchasing riel – of which is has bought $10 million worth over the last few weeks – then foreign currency reserves will fall and leave the country more vulnerable to external shocks, Mr Nelmes said.
The government injected about 627 billion riel, or $152.9 million from the national bank in 2009, amounting to about 1.4 percent of GDP, according to the Asian Development Bank.
The ADB and World Bank both predict that the budget deficit will shrink to about 5.2 percent this year, but this will still mean that domestic financing in 2010 will account for about 0.6 percent of GDP.
“We recommend that the deficit be kept at a level that is consistent with no domestic financing – at around 4.6 percent of GDP,” Mr Nelmes said, adding that “monetary data show that the government continues to draw down its deposits, suggesting that the overall fiscal deficit is running too high.”
He added that signs of a positive recovery in construction, tourism and garment exports so far this year would lend itself to a more sustainable fiscal stance on the part of the government.
The government has attempted to decrease its deficit by cutting military allowances, reforming salary supplements for civil servants, introducing a property tax and banning officials from going on trips abroad using government money.
Officials at the Ministry of Finance could not be contacted for comment yesterday.