Customers sit at a coffee shop and use smartphones earlier this year in Phnom Penh. The World Bank late last week reclassified Cambodia at as a lower-middle-income country. Bloomberg
Cambodia's economic status raised to lower-middle income
Tue, 5 July 2016 ppp
Cam McGrath and Hor Kimsay
The World Bank has officially revised the status of Cambodia’s economy, moving it up a rung from the low-income bracket into lower-middle income territory – a reclassification that economists expect will lead to a scale-back of foreign aid and preferential trade access over the coming years.
The transition became official on July 1 following the World Bank’s annual status revision of world economies, which is based on their estimated gross national income (GNI) per capita for the previous calendar year.
As per the World Bank’s criteria, low-income economies are defined as those with a GNI per capita of less than $1,025 in 2016, lower-middle-income countries are those between $1,026 and $4,035, and upper-middle-income economies are in the range of $4,037 to $12,745. High-income countries are defined as those with a GNI per capita above that level.
Cambodia’s graduation to lower-middle-income status came after its GNI per capita reached $1,020 in 2014 and was projected to surpass the lower-middle income bracket’s threshold in early 2015. The Kingdom was one of 10 countries reclassified by the World Bank this year, and one of only three – along with Georgia and Guyana – to move up the status ladder.
Cambodia shares its new status with 51 other economies, including India, Vietnam and the Philippines.
While the status upgrade is a point of pride for policymakers, indicating success in poverty alleviation programs and efforts to improve income levels, it is also a cause for consternation.
Cambodia’s low-income status made the country eligible for a bouquet of soft loans, grants and development packages, as well as highly favourable trade privileges. The revised income status is expected to result in a scaling back of these benefits, putting more impetus on the country to support its own development through trade and investment.
Curtis Chin, former US ambassador to the Asian Development Bank (ADB) and an inaugural Asia Fellow at the Milken Institute, said while Cambodia’s graduation to lower-middle-income status should be viewed positively as a sign of progress, it comes with its own set of challenges.
“Generally, Cambodia may expect to see a shift in the sort and amount of assistance it might receive from development agencies,” he noted.
For instance, the World Bank uses a country’s income bracket to determine its lending eligibility, including funding by the International Development Association (IDA), the bank’s fund for the poorest developing nations.
Meanwhile, the Asian Development Bank (ADB), the Kingdom’s biggest multilateral development partner, incorporates a similar GNI-based classification into its lending criteria. Last year, the Manila-based lender approved projects totalling $223.1 million, with 29 ongoing loans and 11 grants.
Neither the World Bank nor ADB were available for comment yesterday on how Cambodia’s graduation to lower-middle-income status would impact future funding. However, according to Chin, the reduction in donor assistance will be a gradual one and should be welcomed, not feared.
“The success of the Cambodian economy will be driven by the nation’s entrepreneurs and private sector, not by more [international donor] assistance,” he said. “Reliance on aid agencies is neither sustainable nor a good thing.”
The shift will coincide with a gradual loss of trade privileges. Among these are inclusion in the European Union’s Everything But Arms (EBA) policy, which grants least-developed countries (LDCs) duty-free and quota-free trade access to the world’s largest trading bloc.
Similarly, the broader Generalized System of Preferences (GSP) allows many Cambodian products to enter the US market duty-free and quota-free.
The trade privileges have allowed Cambodia’s key industries – agriculture and garments – to flourish.
Hiroshi Suzuki, chief economist at the Business Research Institute for Cambodia, said much of this duty-free access will dry up once Cambodia loses its designation as an LDC. However, the classification as an LDC is defined by the United Nations, not the World Bank.
According to Suzuki, the UN reviews Cambodia’s LDC designation every three years based on GNI per capita and two additional criteria that assess the country’s human assets and economic vulnerability. The earliest possible transition would be in 2018.
“There would be no chance for Cambodia to [lose its LDC status] in 2018, because it would not satisfy all three criteria,” he said. “It would be a challenge by 2021, but maybe by 2024 the UN would revise [its designation].”
George Edgar, ambassador of the European Union to Cambodia, said even when the Kingdom’s LDC status expires some years down the road the country will have a transitional period to adjust.
“Once a country is confirmed by the UN to have been removed from the LDC list, the country continues to enjoy EU’s EBA preferences for an additional three years, before it is upgraded to the standard GSP regime,” he said. “This allows a smooth progression to help mitigate possible trade flow shocks.”
Commerce Minister Pan Sorasak played down the impact of the World Bank’s revised designation of Cambodia’s economy, but said the Kingdom should use the ensuing years to prepare for the eventuality of losing its LDC status. He said Cambodia should maximise its utilisation of existing duty-free and quota-free trade agreements, while pushing to negotiate preferential trade agreements in other markets.
“The benefit of free trade is still available for us, but we should still try to negotiate with other trade partners such as Ukraine, Belarus and other Asian countries in order to find new markets for our industries.”
“There is still time for us to prepare, and I think that when we will graduate from LDC status in the future, we will be strong enough to stand by ourselves,” he said.