By Heimkhemra Suy

From 1999 to 2019, Cambodia’s financial system surged, displaying a powerful compound annual development fee of seven.7 per cent and driving a fivefold enhance in per capita revenue from US$323 to US$1621. However these statistics belie the nation’s underlying structural frailties.

The COVID-19 pandemic in 2020 laid naked the inherent dangers of an financial mannequin that’s over-reliant on a restricted variety of sectors and excessively uncovered to exterior markets. A pointy financial contraction from 7 per cent development in 2019 to three per cent in 2020 served as a stark reminder of Cambodia’s susceptibility to exterior shocks and underscored the crucial of financial diversification.

Cambodia’s financial panorama is dictated by a slender export base and a circumscribed set of export locations. Key export commodities corresponding to clothes, rice, and cassava, alongside tourism companies, represent roughly 80 per cent of complete exports, with the European Union and the US absorbing 70 per cent of those.

The World Financial institution’s marginal downward revision of Cambodia’s 2023 development forecast by 0.1 per cent from an preliminary 5.5 per cent is based on the looming spectre of a worldwide financial deceleration. The confluence of a slowing Chinese language financial system, a waning demand for clothes, a sluggish resurgence of Chinese language vacationer influx, tighter monetary circumstances and a downturn within the building sector all pose potential headwinds.

However this narrative overlooks the robustness and holistic financial developmental potential {that a} diversified financial system may endow Cambodia with. Sectors corresponding to agro-processing and manufacturing may emerge as game-changers. Harnessing these sectors’ potential, dovetailed with the nation’s considerable agricultural assets and burgeoning younger demographic, may set up a resilient development paradigm. This technique may catapult Cambodia in direction of its formidable objective of ascending to high-income standing by 2050.

Cambodia’s agro-processing sector represents an untapped wealth of potential, at the moment stagnating in an underdeveloped state. The nation’s financial technique has been predominantly centered on the milling of rice, rubber manufacturing and pepper cultivation, with a serious portion of those uncooked supplies exported. However this method has precipitated a considerable financial deficit, with losses estimated to be round US$2 billion. When juxtaposed with the agricultural revenues of neighbouring international locations like Thailand and Vietnam, which generated revenue value US$102 billion and US$44 billion respectively in 2018, the stark disparity turns into evident. Cambodia, in distinction, information a relatively meagre US$590 million.

Native producers are sometimes caught in a dilemma of oversupply and restricted processing capability. They’re compelled to promote their perishable crops at costs arbitrarily — and sometimes unfairly — set by opportunistic patrons, or face the grim prospect of their items going to waste. An expanded agro-processing business may deal with this oversupply and value deflation subject, enabling Cambodia’s producers to extract extra worth from its agricultural exports.

In parallel to the agro-processing sector, there may be an rising promise within the mild manufacturing sector. In 2017, Cambodia was the European Union’s fundamental bicycle provider, and in 2022, it turned one of many world’s high 5 bicycle exporters.

The talents hole that at the moment hinders the enlargement of Cambodia’s agro-processing and manufacturing capabilities might be addressed successfully by means of Technical and Vocational Training and Coaching (TVET). On condition that over 50 per cent of Cambodia’s inhabitants is of working age, but lower than half have accomplished highschool, TVET’s deal with particular talent acquisition and shorter studying length aligns nicely with the nation’s demographic profile. Partnerships with skill-training businesses or massive tech corporations might be pivotal on this transformation course of.

Whereas bodily capital influx, considerably from China, fuels the Cambodian financial system, the event of human capital lags behind. To deal with this, international corporations needs to be required to speculate a portion of their income into ongoing coaching for Cambodian employees for at least three to 5 years. Such a requirement would coincide with the tax incentive interval, accommodating the educational curve of employees in particular industries.

Transitioning to new industries would require time and assets, each of that are at the moment constrained for Cambodia. The 19 per cent shrinkage in tax income within the first half of 2023 compelled the federal government to utilise nationwide financial savings to deal with a US$412 million funds deficit. As Cambodia develops, it might lose preferential entry to international direct investment-rich markets and, like different rising economies, might want to mobilise home assets.

As an alternative of climbing taxes, which may deter potential traders, the federal government ought to deal with curbing corruption, simplifying tax compliance and digitising enterprise operations to decrease enterprise working prices. Such methods wouldn’t solely allow companies to thrive however would additionally appeal to home investments and new ventures, boosting future voluntary tax income.

Prosperous Cambodians and personal companies needs to be inspired to spend money on strategic public–non-public partnerships to fund the agro-processing business, significantly for the import of storage and processing applied sciences, and to assist talent coaching for employees within the manufacturing business. Know-how switch and innovation might be additional spurred by partnerships between international and home corporations, and tax incentives or reductions for tech and equipment imports.

In the end, the journey in direction of financial diversification requires strong insurance policies and constant enforcement, which necessitates a crackdown on corruption. The brand new authorities faces a vital choice — to yield to the problem or to boldly pursue the institution of a resilient and inclusive financial mannequin. Success on this endeavour is not going to solely validate their management but in addition solidify their legitimacy.

• Concerning the writer: Heimkhemra Suy is Monitoring and Analysis Advisor in Phnom Penh, Cambodia.
• Supply: This text was printed by East Asia Discussion board