Global Issues Dampen Cambodia’s 2022 GDP Growth

While Cambodia’s GDP shows positive signs of rebound, global issues, the continuing Covid-19 crisis in China, a slowdown in consumer demand and rising inflation will hamper 2022’s growth, according to an IMF report
Workers work on a real estate project in Phnom Penh. Kiripost/stringer
Workers work on a real estate project in Phnom Penh. Kiripost/stringer

Cambodia’s gross domestic product (GDP) growth showed signs of rebound in the second half of 2021, but 2022’s economy has been hit by developments in China, a slowdown in consumer demand and surging inflation, according to a report by the International Monetary Fund (IMF).

The positive GDP rebound in the second half of 2021 was mainly driven by export goods, according to a report by IMF’s executive board. However, this year’s growth has been hampered by the continuing Covid-19 crisis in China, dwindling consumer demand in countries such as the US and Europe – significant markets for Cambodian manufacturers – and tighter global financial conditions.

In addition, inflation has surged, the cost of fuel and fertilizer have risen, export orders for the second half of 2022 have weakened, and the real estate market is slowing, IMF reported in its Article IV consultation with Cambodia.

Despite these challenges, recovery is predicted to continue, with IMF forecasting real GDP growth to be five percent this year. This comes in the wake of strong export performance in early 2022. In 2023, GDP growth is projected to hit almost 5.5 percent due to the continued recovery of tourism and ongoing policy support.

Despite this, IMF said external pressures and rising prices will continue to have a negative impact on real disposable income. IMF said inflation is expected to peak this year, slump to lower levels in 2023, and decline in the years after. It added this is dependent on it remaining confined to imported goods.

Uncertainty around the outlook is particularly high, and risks are tilted to the downside. The report said the most pressing risks are from rising private debt, conditions in key large economies, and inflation.

Public finances are also expected to gradually improve. In 2021, spending pressures and lower-than-expected tax revenue resulted in a fiscal deficit of just more than seven percent of GDP. This year, the deficit is expected to narrow to just above four percent of GDP. While in 2023, a strong bounce-back in revenues are predicted and expected to further decrease after.

Further shocks to exports and growth mean public debt-carrying capacity remains vulnerable, but risks of external and overall debt distress remain low. This is dependent on public debt being constrained in the future and that the increase in private debt is not associated with an increase in contingent liabilities of the sovereign.

The report said, “Executive Directors welcomed Cambodia’s strong economic recovery from the pandemic supported by the country’s strong economic buffers and robust crisis response. Directors agreed that the growth outlook is broadly favourable, notwithstanding downside risks from slower external demand and rising domestic vulnerabilities, including elevated levels of private debt.”

In the report, the directors encourage authorities to calibrate fiscal policy to help support vulnerable households, without compromising price stability, while also taking steps to address financial sector risks and corruption vulnerabilities.

In addition, they encouraged the National Bank of Cambodia to rein in credit growth by gradually restoring monetary conditions to pre-crisis levels. They also underscored the importance of implementing corporate insolvency, debt and bank restructuring, and deposit protection frameworks.

“Directors supported authorities’ current fiscal plans to provide insurance against downside risks to aggregate demand while maintaining steady reduction in fiscal deficits over the medium term. However, given wide external imbalances and strong credit growth, they emphasised that fiscal support should be well targeted. Social protection measures should continue to be used to protect the poor against the effects of inflation, coupled with offsetting cuts elsewhere,” it added.

The importance of policy frameworks to ensure resilience over the longer term was also noted. Directors encouraged efforts to enhance spending efficiency and strengthen revenue mobilisation, including broadening the tax base and rationalising exemptions. The recent issuance of the first domestic government bond was also a welcome development.

Work carried out to implement anti-corruption action plans were also welcomed, along with continued efforts to strengthen governance frameworks more broadly. Directors stressed the need for structural measures to boost productivity and help raise living standards and restore external balances.

The importance of improving data quality through capacity development was also highlighted, while authorities were encouraged to build on efforts to strengthen climate adaptation and mitigation.