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ECONOMIC MONITOR: CAMBODIA

A Heavy Burden

By Bertil Lintner

Cambodia is continuing to experience slow but steady economic growth and almost zero inflation, but there are other storm clouds on the horizon: A mounting foreign debt that, in the long run, could place the country in the same category as many debt-ridden countries in Africa--and adverse weather conditions that could lead to food shortages in the immediate future.

According to official figures, Cambodia's national debt of $3.07 billion almost equals its GDP, which was $3.20 billion last year. It includes $653 million owed to multilateral organizations such as the World Bank, the International Monetary Fund (IMF) and the Asian Development Bank, and at least $1.6 billion that Cambodia received in bilateral loans from its erstwhile ally, the former Soviet Union. Cambodia owes another $500 million to the United States and at least $210 million to China.

Cambodia's ability to service these debts is in serious doubt. The ADB stated in its annual Outlook report for 2002 that this year's growth of garment exports and tourism receipts--two major foreign-exchange earners--were expected to be the lowest for several years. Cambodia's GDP overall growth this year, 4.5%, also lags behind its immediate neighbours, Laos (with 5.8%) and Vietnam (6.2%). It is true that the third neighbour, Thailand, is expected to have a slower growth rate, a mere 2.5%, but the Thai economy is much bigger than Cambodia's. To further exacerbate the situation, foreign direct investment continues to slump compared with the relatively rosy years in the mid-1990s. Agricultural production is also in jeopardy, as a lack of seasonal rains in August--followed by floods in September--may lead to food shortages.

At that time, rice planting nationwide was running at only 24% of the average. A food crisis could lead to an ever heavier debt burden for Cambodia. For the country to solve its dual problems, the government must rapidly increase revenue collection and restrict expenditure, says the Cambodia Development Resource Institute, or CDRI. Revenue collection amounts to only 11.7% of GDP, one of the lowest figures in the region. But these are unpopular moves, and the outcome could well be an "Africanization" of Cambodia, with the country trapped in a vicious circle where increasing debts and little revenue make real development almost impossible.

But there are also some bright signs. According to the CDRI, Cambodia has reaped some benefits as a direct result of last year's September 11 terrorist attacks in the U.S. Some American as well as European clients have increased their imports of garments from Cambodia, and correspondingly reduced them from Islamic countries such as Pakistan, Bangladesh and Indonesia. This led to an immediate stop to the reduction of jobs in that sector, which may even see slow growth over the next few years. The tourism industry has also benefited from these developments. Travellers, mainly from other Asian countries, who earlier expected to visit the U.S. are now turning to non-Muslim Asian destinations, including Cambodia.

If everything continues as expected, Cambodia may see 6.1% GDP growth next year. And, if the weather improves, the country's food situation may also not be as catastrophic as it was in 2000 and 2001, when the country was hit by severe floods. But even if the economy rebounds according to plan, it would still not be enough to reduce poverty. At a seminar in the capital, Phnom Penh, in August, local IMF representative Robert Hagermann stated that substantial growth is harmed by poor infrastructure, low productivity in agriculture and high trade-facilitation costs such as port fees. And now, mounting foreign debt can be added to the impediments.

This article first appeared in the Far Eastern Economic Review, September 26, 2002

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