Last week, the European Commission recommended the selective withdrawal of Cambodia’s Everything-but-arms (EBA) trade status after a year-long review of the human rights and democracy situation in the Kingdom. While the EC claims that the removal “will affect selected garment and footwear products and all travelling goods and sugar”, which will cost Cambodia about $1.1 billion, the government says the real enemy to the Kingdom’s industries is the notorious COVID-19 virus. In an exclusive interview with Khmer Times, Chan Sophal, director of the Centre for Policy Studies (CPS), says both EBA and the epidemic are threatening Cambodia’s economy.
In January, the Ministry of Economy and Finance forecast that this year the Kingdom’s economic growth will be 6.1 percent. Do you agree with this assessment?
The Cambodian economy is growing and growing thanks to the increase in both adult population and economic activities. The total GDP almost reaches $30 billion and the six percent growth forecast by the ministry, World Bank and IMF, means an extra $1.8 billion to the economy. When this forecast was made, I believe the three institutions did not take into account the Novel Coronavirus or COVID-19. They were also not clear about the EBA situation, whether it will be completely or partially withdrawn, so it had been treated only as a risk. In an economic projection, meanwhile, only medians are used in assumption amid what could actually happen.
This year, there are many risks, including the decline in the global economy, Asean’s economy and the Chinese economy as well as the presence of a trade war between the US and China. These issues do not make the atmosphere look good, thus possibly causing real growth to fall below the forecast one. Now, the Novel Coronavirus and EBA cut are not making it any easier for us. Overall, I see that this year’s economic growth below six percent.
The EU claimed that the removal “will affect selected garment and footwear products and all travelling goods and sugar”, which will cost Cambodia about $1.1 billion. What is your view on that? How serious is it?
According to my understanding and analysis, I find that the requirement for Cambodia to pay some tariff for its export to EU doesn’t have a huge impact on the country’s economy. Its effect is controllable because it only accounts for 20 percent of the Kingdom’s total export to EU. One billion dollars worth of Cambodian products to European countries shall be taxed, costing about $120 million, which is less than 0.5 percent of the economy’s growth or around one percent of the national revenue.
With enough reserve budget, the state can even compensate for those tariff. In the end, the workers still can keep their jobs, and the business owners still make profit. However, that is not a good choice. Everyone should play their part on this. Unnecessary expenses should be cut by the business managements while the state should make it cheaper for businesses to operate in the country, starting with lowing utility costs and public service fees.
Apart from EBA and COVID-19, do you see any other challenge faced by investors in Cambodia?
First of all, the government has to eliminate corruption and the asking of under-the-table money to help the investors cut costs. Also, it has to make the business environment better and more convenient for the investors by easing and accelerating bureaucratic procedures. In addition, it has to invest more on infrastructure, especially electricity and transportation, for the businesses to operate smoothly. The government also has to improve its judicial system and conflict resolution method, as well as work to increase financial access for investors. Moreover, the companies and business owners have to understand more precisely about the country’s laws and tax system.
If the Kingdom fails at its reform, will that seriously affect its level of competitiveness regarding attracting investors among countries in Southeast Asia?
In general, investors look mainly at the profit, the result of deduction of operational cost from the revenue. Foreign businessmen have choices of countries to invest in to increase their profit. Vietnam is ahead of us, with their expanding free trade deal with the EU, cheaper electricity, better infrastructure and more skilled and productive workers. But, some investors come to us because we still have EBA. To catch up with our neighbour, there are many goals that Cambodia has to work hard to achieve.
How about COVID-19? What impact do you think it could have on Cambodia’s economy?
Unlike EBA, the virus could have serious impact on the economy. It disrupts the supply chain of raw materials for factories in Cambodia, which could lead to the suspension of production and workers. Tourism is also suffering, as Chinese tourists make up a majority of those who visit Cambodia. Hotels and guesthouses, restaurants and transportation service providers are losing money.
I cannot say how many percent of revenue has gone down, but notably, tourism in Cambodia was already in decline in 2019 to begin with. COVID-19 has made it much worse. The real estate sector could not escape it either. Property owners may be having a hard time collecting their rents and paying the instalments for loans they received from the banks. People are also afraid to spend their money, so there will be fewer transactions, imports, less taxes, and less revenue for the government.