The morbid effects of the coronavirus has prompted the Kingdom to cut back unnecessary spending, impose fiscal and monetary policies, and sacrifice tax revenue. But are these enough to take it through this rough period?
Two weeks ago, a question popped up whether China could be hiding figures of Covid-19 new cases after successive days of reporting none. The question is moot but realistically speaking, why would they?
They have lost a lot. Be it in the number of people who died or in the contraction of its economy. A host of fiscal, monetary and security measures, both austere and desperate, were implemented to flatten the Covid-19 curve and deal with the economic impact.
The measures including shutting down factories, restricting human movement and closing borders crippled its economy, which was already chafed by the protracted US-Sino trade war and a slowing global economy. Yet, it had to be done.
In Cambodia, the predicament is sullen, all the same. Not just the rising patient numbers but Covid-19’s collateral impact on the working class and economic sectors.
In mid-March, a fiscal stimulus plan of $800 million to $2 billion, equivalent to seven per cent of the gross domestic product (GDP), was announced to ease the overarching effects of the coronavirus in six months to a year.
The government also dropped hints of an emergency order with a curfew between 8pm and 5am, and even the use of military might to ensure restricted movement, if necessary.
All these are expected to be financed through its savings, which was bumped up by tax revenue and production, and the rationalisation of its budget by cutting down non-prioritised expenditures
The rationalisation, such as cutting back overseas meetings and postponing large public infrastructure projects to 2021, has freed up $471 million or 5.7 per cent of the government budget.
Prime Minister Hun Sen is also donating his salary for the next seven months to fund Covid-19 efforts.
But is the overall package sufficient? Understandably, iis hard to predict.
“In a worst-case scenario, I think Cambodia can implement a lockdown, although how long we can sustain or whether the planned reserve package is sufficient or not may depend on how long the outbreak will last,” said economics professor Samreth Sovannroeun.
Unlike other countries, Cambodia has been slow to implement a lockdown. To be fair, the figures have not grown exponentially. As of April 1, 110 cases were reported to be positive while 34 have recovered.
Nevertheless, the outlook is grim.
The latest World Bank report sharply revised Cambodia’s forecast economic growth for 2020 to 1.0 per cent (lower case) and 2.5 per cent (baseline), from around seven per cent previously, depending on two scenarios.
The baseline scenario showed severe growth slowdown followed by a strong recovery while the latter indicated deeper contraction followed by a sluggish recovery.
The foreboding outlook, which includes the likelihood of increased poverty, revealed the magnitude of potential economic distress and the need for urgent action.
“Containment of the pandemic would allow recovery but the risk of durable financial stress is high even beyond 2020,” World Bank said.
A recent simulation done by Asian Development Bank (ADB) revealed that in a best-case scenario on the back of a two-month-long travel ban and the sharp decline in domestic demand due to the outbreak, Cambodia could face a 1.15 per cent impact to its total GDP amounting to $283.3 million.
If the outbreak lasts for six months, up to $711.4 million could be hived off the GDP. Even grimmer, ADB said a hypothetical worse case situation shows a nearly $1 billion economic loss in the event that Cambodia experiences an outbreak of its own beyond six months.
The fact is, economic growth has been slightly challenged since the European Commission’s decision to partially withdraw the Everything but Arms (EBA) scheme in August. It was further dampened by the slowdown in Chinese tourist arrivals starting in January.
So, hard times were evident as hundreds of thousands of blue-collar employees in the two million-man manufacturing and service industries teetered on the brink of income loss as a result of unemployment or partial pay.
A few weeks ago, the government said it would absorb 20 per cent of the $190 monthly salary package of minimum wage workers while the employer pays 40 per cent but losing 40 per cent of a full income is a large chunk.
As a least developed country with goals of hitting upper middle income in 2030, rolling back to lower growth can alter its dynamics, such as achieving higher gross national income (GNI) per capita. In 2018, GNI per capita was $1,380 compared to $1,230 in 2017, ADB data showed.
But with the outbreak disrupting raw material imports from China and the temporary suspension of 57 factories, and more expected in the coming weeks, experts are saying that 90 per cent of the textile sector is at peril, which ultimately affects some 500,000 workers.
On top of that, 600,000 workers in tourism-related sectors such as hoteliers, tour operators, and waiters, have been left to fend for themselves as tourist arrivals turned to a trickle before halting altogether due to the lockdown in China.
The plunge in Chinese tourist numbers is devastating because of their large representation in total arrivals. In 2018, 33 per cent of total tourist arrivals were Chinese nationals, who contributed nearly 20 per cent of Cambodia’s GDP that year.
ADB showed that a decline in tourism revenue could cause a 1.4 per cent to 3.5 per cent drop which translates to $346 million and $857 million in losses, respectively, to the Cambodian economy.
It is foretelling, seeing that many hotels have pulled down the shutters because they simply cannot afford the rent and salaries anymore, said Cambodia Hotel Association president Clais Chenda.
“Initially, the staff worked on shifts or took temporary leave but the solution did not last as revenue fell to zero. Employees lost their jobs while hotel owners are facing bankruptcy,” she added.
The order to close karaoke outlets and casinos has also displaced several thousands of workers who rely on tips to make up for their small wages.
Ath Thorn, president of Cambodia Labour Confederation (CLIC), lamented that the highly-staffed service and manufacturing sectors are the worst hit.
“Some have lost their livelihoods while others are left with partial salary, which is not much. Ninety per cent of them have microloans. Not having an income is weighing down on them especially with Khmer New Year around the corner,” said Thorn, a wage earner himself.
Taking stock of measures
Cambodia’s delay in implementing a lockdown points to calculated considerations, such as the drawing up of the state of emergency law and lining up adequate measures.
Besides the fiscal stimulus package, four-month tax breaks for hotels and guesthouses in Siem Reap and Sihanoukville, and a six-to-12-month tax holiday for affected garment factories were introduced this year.
Some $500-$600 million in low-interest loans will also be disbursed to businesses via financial institutions to help with their cash flow problems.
Separately, the government has spent $30 million to purchase protective equipment for the healthcare sector.
Replying to The Post, the Ministry of Economy and Finance said the stimulus package would be used as wage subsidies and social protection or safety net programmes, and re-skill workers.
It is considering other intervention measures such as providing financial support and food to poor and vulnerable groups in case of emergencies, as well as financing aid to airlines registered in Cambodia.
Restaurants and travel agents in Sihanoukville, Kep, Kampot and Phnom Penh could also benefit from the expansion of existing measures.
The ministry is looking at expanding its 20 per cent wage subsidy for garment workers and retraining courses for those affected in the tourism sector provided they enrol in the programmes.
“In short, the government will continue to focus on supporting the poor and vulnerable groups, and help businesses stay afloat. More importantly, Cambodia plans to raise the Covid-19 expenditure, if needed,” the ministry said.
That is well and good but the absence of a breakdown makes it difficult to take stock of its efforts, as some the efforts are already in place in light of the EBA’s partial withdrawal.
In the meantime, the National Bank of Cambodia (NBC) introduced a series of monetary measures to inject liquidity and ensure continued lending to keep the economy stimulated.
It includes delaying the 50 per cent capital reserve requirement of banks and reducing the interest rate on the liquidity-providing collateralised operation.
The central bank also instructed banks and microfinance institutions to assist four target groups in restructuring their loans to ease the burden of borrowers facing major dips in revenue and difficulty accessing credit.
On the offside, banks are likely to feel the impact on their interest income, but NBC is certain that its strict regulations during the good time meant that banks and microfinance institutions to have the capital buffer to weather this situation.
It plans to work closely with the Association of Banks in Cambodia and Cambodia Microfinance Association to ensure effective implementation of the guideline to ensure temporary relief of the repayment burden of the borrower.
UN Development Programme Cambodia resident representative Nick Beresford commended the NBC for its quick measures to ease liquidity constraints by reducing the reserve requirements to seven from 12.5 per cent.
“The opportunity now is on the fiscal side for the government to put into operation a stimulus programme to help raise aggregate demand. The measures to pay workers 60 per cent of the minimum wage where their factory has closed is very helpful,” he said.
The package could include a cash transfer to help the poor, the near-poor and vulnerable.
“When those in poverty [or close to it] are given some financial assistance they are likely to spend it quickly on essential goods in their local markets. That helps them and their families, and collectively, it helps to boost the economy too,” Beresford said.
Malaysia and South Korea, which have instituted a strict lockdown, injected additional funds to reduce the financial struggles which have affected a cross-section of their societies, including small businesses, and formal and informal workers.
For Cambodia, the current economic pains are merely the tip of the iceberg, seeing that a third of the working population earns less than $200 a month.
The national poverty level was around 13.5 per cent in 2014, according to the ADB, and with a higher number of Covid-19 cases found in the provinces, the situation is worrisome.
This is why Jayant Menon, a visiting senior fellow with Singapore’s Institute of Southeast Asian Studies-Yusof Ishak Institute, concurs with Beresford that the stimulus to offset a slowdown in growth due to Covid-19 should shift to direct fiscal measures.
“These measures should be targeted to increase spending as well as assist the most vulnerable groups in Cambodia that are being particularly hard hit by the pandemic.
“This includes the poor and other marginalised groups, and workers in informal sectors that make up the majority of employment in the Kingdom.
“The poor will also spend almost all of any increase in their income and this is exactly what is required during a sharp drop-off in demand like in the current situation,” Menon said.
With little retail demand due to the outbreak, western brands and retailers are cancelling or postponing orders, causing panic among garment manufacturers who have asked its buyers not to give up on Cambodia.
Small and medium-sized enterprises (SMEs) are equally reeling although one half of that sector which makes essential items such as soap, shampoo, soy sauce and alcohol remains steady despite the lack of raw supply, said Federation of Association of SMEs president Te Taingpor.
“However, the production of non-essential items, for example, clothing, snacks and souvenirs, is raising our operating cost, and we find it hard to service our loans. We need to stop producing to lower the expenditure and this could affect 50 per cent to 70 per cent of workers,” he said.
The temporary suspension might be inevitable due to falling demand but the government has yet to pay its 20 per cent of workers’ salary, said CLIC’s Thorn whose organisation represents about 110,000 members with 286 trade union and communities in eight job sectors.
“Restructuring loans is a good move but subsidies or cash handouts are better options as many don’t have any money left. They can use the handouts to buy food or pay for transport,” said Taing Por.
Can the funds hold up?
The proof of the pudding is in the eating, or so the idiom goes. Meaning to say, only when a lockdown is implemented can the actual benefit of some of the measures be weighed and if the funds are sufficient.
Samreth said with limited resources, helping the right targets by giving priority to individuals, firms or businesses severely affected by the outbreak is very important to avoid a moral hazard problem.
“[Thus] it may be difficult to identify the right targets due to the fact that economic activities are interconnected and complicated,” he added.
However, another challenge is its fund adequacy. Globally, billions of dollars in existing funds are being topped up to fight against Covid-19 especially where situations turned graver.
Cambodia’s budget seems somewhat conservative but experts are confident it would pull through with the help of development partners.
“The government’s fiscal position has always been strong with comparatively lower levels of debt, roughly a third of the GDP, and high levels of reserves, which positions it well in respect of leveraging new loans.
“As a lower-middle-income nation, Cambodia still enjoys concessional rates of interest and longer payback periods,” Beresford said.
In the past month, multilateral donors such as ADB, World Bank and International Monetary Fund have lined up low-interest financing packages that total up to $70 billion for emergency use.
When asked, the ministry said it would welcome every source of funding, including that from its development partners, NGOs and individuals as it is in line with the government’s policy direction.
“Currently, our partners such as Japan, Germany, China and the World Bank have expressed commitment to fight against Covid-19,” it said.
Till then, Cambodia is expected to ride the waves within its means.