Pailin (Cambodia). 19/01/2008: Cassava roots harvest. Even if the agricultural sector seems to be less hit by recession, the prices of some products, like cassava root, are getting lower.
©John Vink/ Magnum After economic growth soared into record double-figures, one may wonder whether Cambodian economy is about to suffer its first recession in 2009. This is what economists at the International Monetary Fund (IMF) fear in their conclusion released on March 6th after having carried out a week-long mission in Cambodia to assess the impact of the crisis on the Kingdom. Although they might be alarmist, the many revisions made to economic growth predictions [see also ‘Spotted on the Web’ 24/02/2009 ] were until now rather weighted by recommendations emphasizing the assets of the small Asian state. This time, discussions became slightly heated and experts at the IMF confessed it straight out: they will not answer for any prediction from now on as there is increasing uncertainty as to the future of Cambodia’s economy. Facing the situation, the few recommendations issued by the IMF or the Asian Development Bank (ADB), who held a forum at the beginning of this week in Manila, seem, above all, to show the helplessness felt by many developing countries such as Cambodia. Recession: a word and an evil that were still unknown yesterday
“Recession”. Who would have thought that only a few months ago, the word would appear in the Cambodian economic language, which focused until now on “growth”, “development” and “expansion”? The team of IMF experts came especially from Washington to visit Cambodia from February 25th through March 4th and took care of not using that particular scary term, but the conclusion they reached is no less explicit: according to the team’s projections, the Cambodian Gross Domestic Product (GDP) should fall by about 0.5% in 2009, compared with the previous year’s GDP.
Report after report, the picture gets blacker and blacker
“Prospects for Cambodia’s economy for this and next year are expected to be considerably less favourable than envisaged [at the time of the IMF’s 2008 Consultation discussions , they say, while taking care of detailing the reasons for their concern. “Garment exports are under pressure due to sharply lower retail demand in the United States and European Union. Tourist arrival growth has turned negative as the economic downturn in key tourist-source countries cuts into discretionary spending. [These expenses are not related to the fulfilment of basic needs - Editor’s note]. Moreover, last year’s high inflation combined with the recent appreciation of the U.S. dollar and riel has reduced Cambodia’s competitiveness. Construction activity and foreign investment are also slowing rapidly as external investors cut back and financing conditions tighten”, the economists say.
The only positive note in the blackening picture is that “agriculture performed better than anticipated last year”, but however, as detailed, “the fall in global agricultural prices may limit further gains this year”; and the inflation should go down again into single digits in line with lower oil and food prices and easing domestic demand pressures.
The new trend: "we don’t know"
Finally, this assessment feels like some sort of déjà-vu and very much resembles, in a more backed-up version, the predictions made by the World Bank, the Asian Development Bank, the Cambodian government and the IMF itself in late 2008, when they issued predictions which nevertheless varied between 1 and 6 – from one organisation to the other. But this time, the IMF appears worryingly distressed facing a situation which seems out of control, according to the experts’ conclusion, as they stress the “degree of uncertainty” which is a lot higher than the average in their own analyses. “The outlook for 2010 is also highly uncertain, hinging critically on global and regional growth prospects”, they acknowledge.
The days of budget austerity are over
Despite this climate of uncertainty and Cambodia’s strong dependence on foreign economies, the IMF mission group insisted on issuing their recommendations. Indeed, they invite the government to launch a “fiscal stimulus” larger than the one that the government initially intended to set up in its 2009 budget. After talks, the authorities allegedly said they intended to follow the suggestion. The IMF, breaking away from its usual calls to state austerity, now reckons that the overall government budget deficit could be allowed to rise to around 4.75% of the GDP without any damage, a rate which would eventually be higher than the initial objective of 4.25%, settled by the government in its 2009 budget. Only a month ago exactly and exceptionally, the IMF recommended a budget deficit of 3.25%, a rate which was then thought to be enough to “provide an adequate fiscal impulse without undermining stabilisation efforts” began by the Cambodian state.
The IMF, still issuing brand new recommendations, also advised that most of the additional stimulus should come from higher spending, as this “would provide more effective support to growth” and strongly urged the government to “avoid backsliding in tax administration efforts at risk of further eroding an already-low revenue base”. These expenses, economists say, should target two goals: securing “safety nets” for the poor and establishing high-quality infrastructure projects to “strengthen competitiveness” in the Kingdom. These noble preoccupations nevertheless bring one to wonder: was it really necessary to wait for the crisis, for the IMF to eventually suggest that Cambodia and developing countries set themselves such priorities? |
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