Will Cambodia’s stimulus package for a plunging economy do any good?
Highly known and categorised for tourism and export manufacturing, Cambodia’s economy is in an unanticipated plunge owing to Covid-19 that affected the key sectors of the country’s economy. The World Bank predicted the country’s growth to slow sharply by 2.5% on the baseline scenario. The COVID-19 outbreak and slow recovery in global economic activity alongside prolonged financial market turmoil pose risks to Cambodia’s growth outlook. With the new economic stimulus package in effect, Cambodia wishes to bring its economy back on revival.
However, Sam Rainsy, President of the Cambodia National Rescue Party, Leader of Opposition and Former Minister of Economy and Finance, said in an interview to The Kootneeti, that Covid-19 has highlighted the weakness of the Cambodian Economy which include lack of diversification and over-reliance on investment flows from China.
The country’s two key growth sectors, Tourism and Export manufacturing, has been the hardest hit among the others and will consequently leave Cambodia’s microfinance borrowers in a critical debt trap, with many borrowers committing suicide to escape the debt. He said, “The impact on tourism and exports has been dramatic. It leaves Cambodia’s microfinance borrowers unable to repay their loans”, and the kingdom’s regime abandoned the borrowers to their fate by “Encouraging Banks to repossess land and property from people who have no means to pay”.
By the end of 2019, more than 2.6 million Cambodians held more than $10 billion in microloans. The average loan of $3,804 was by far the highest in the world and more than double Cambodia’s GDP per head. Cambodia is one of the few countries where MFIs hold the land titles of borrowers as security. Microfinance plays a major role in the country’s economy to a great extent that, even before COVID-19, research from the Cambodian human rights organization Licadho and Sahmakum Teang Tnaut (STT), an NGO which supports urban poor communities in August 2019 showed a connection between microlending and abuses such as coerced land sales, child labour, debt-driven migration, and bonded labour. Research published jointly by the Cambodian human rights organization Licadho and local trade unions in June 2020 showed how these trends have worsened during the pandemic. The report from Licadho and the trade unions states: “MFIs, commercial banks and their investors – many of which are the development agencies or state banks of European governments – are responsible for widespread over-indebtedness in Cambodia. They have continued to fund an aggressive expansion of the microloan sector and loan portfolio sizes, despite warnings from economists and human rights NGOs about the excesses and abuses in the sector.”
On average, combined monthly payments for debt and food expenses exceeded workers’ salaries, meaning the vast majority of microloan borrowers were facing a choice between cutting down on food or making their loan repayments.
According to Mr Rainsy, foreign financial institutions that ‘Invest’ in Cambodian microfinance including, French bank BRED, Triodos of the Netherlands, and Sumitomo Mitsui of Japan, all of which have stakes in Acleda, Cambodia’s largest microfinance lender are a part of the problem too. To curb the cascading burden on microfinance borrowers, he calls for the reduction of microfinance interest rates from 18% to 5% and urges responsible investors in Cambodian microfinance to push for the revision to come in place.
Vongsey Vissoth, Ministry of Economy and Finance Permanent Secretary of State asserted at a briefing on the Covid-19 stimulus package, “Expect more borrowings because we need to spend a lot” but, Mr Rainsy is in a divided opinion on borrowings since the country is heavily dependent on China for debt relief. He says, “The problem is that Cambodia is just one of many debtors. Giving debt relief to one country would lead to demands from China’s debtors across the board, which Beijing can’t afford to allow. The prospective loss of duty-free access to European markets due to Hun Sen’s dreadful long-term human rights record will make any recovery harder to achieve”, Given the EU sanctions on the country.
While many countries are offering aid to Cambodia’s economy, he believes this progress as “best treating the symptoms while ignoring the cause of the disease”. Since the Paris Peace Agreement of 1991, Cambodia has received more than $20 Billion in the form of foreign aid; but, the economy is still undiversified and undeveloped, and the dictatorship is still in place.
He thinks that total reform in the country’s economy, an end to corruption, stronger poverty rights, and a functioning system of tax collection will open up the country to much wider groups of international investors, thus providing a trajectory for growth for the economy in the future.
