Miguel Eduardo Sánchez Martín, a senior economist at the World Bank, talks about the challenges ahead for Cambodia’s economy
Can you tell me about the growth Cambodia has experienced in recent years?
Over the past two decades, Cambodia has been the sixth fastest growing country in the world, with an average rate of 7.6%. This has been accompanied by very significant poverty reduction. The population [living] in poverty has dropped from more than 50% in 2004 to just around 13% in 2014. In recent years, the growth has been around 7%. The drivers have been agriculture, the garment sector, garment exports, tourism and construction.
What industries should Cambodia focus on moving forward?
The focus has been so far on low-cost, labour-intensive garment exports, which is normal. Many countries are going through this type of development. The garment industry is normally one of the first to come to a country.
There is a US dollar appreciation, which is making Cambodian exports more expensive – for example, compared to those of Vietnam, and at the moment wages are going up. In order to maintain the profit margin and keep employing people, being competitive, there is a need to add value to the products exported. So, basically, moving a little bit from the cheaper garment exports to some exports with more value. This is one way forward.
And the other way forward is to try to crack into industries other than garments. You’ve already seen some of this happening. There are a few companies that are assembling small electrical appliances, or even some auto parts. These are kind of pioneers of economic diversification in Cambodia.
How have declining rice prices in recent years affected the country?
Poverty reduction happened in Cambodia especially in 2007-2009, which were the years in which commodity prices and rice prices were very high. Since then, you have a kind of smooth decline trend. Of course, that means that these tradewinds that were making it easier for Cambodia’s agriculture sector to keep growing are no longer going to be there. Again, similar to the garment industry, there may be a need to move up from exporting unprocessed rice into perhaps trying to export milled rice or trying to diversify into different agriculture products like horticulture or all sorts of other agricultural exports.
Do you think that investment has been too focused in Phnom Penh, especially in terms of construction and infrastructure, and that the provinces have been ignored?
There is obviously a construction boom in Phnom Penh going on. This is something you can observe just by going outside and counting the number of buildings that are under construction at the same time. This construction boom has been mainly swelled by – not by domestic consumption – but swelled by foreign direct investment. Also, considering that perhaps in Cambodia it’s a dollarised economy, and this is going to keep the currency stable. This makes it more attractive for foreign investors to invest in Cambodia.
It’s not only in Phnom Penh, it’s also happening Sihanoukville. But mainly Phnom Penh so far, there have been very large developments, especially of modern apartment buildings. Not the majority of Cambodians are able or willing to move into these apartment buildings. These are mainly owned by foreign investors, which may be to some extent good in the sense that the risk of any overheating in the sector kind of stays overseas.
Do you think it would be wise for Cambodia to stop using the US dollar in common exchanges?
So far, Cambodia has been doing really well with dollarisation, and probably this may have been one of the causes of success over the past few years, in the sense that it has provided some of the certainty to foreign investors who can see that Cambodia has been very successful in attracting foreign direct investment. So far, so good.
Of course, the dollarisation has limitations – in terms of setting your own monetary policy… with the US dollar appreciating against the Euro and other currencies, Cambodia has seen more success. So, it would be of course [good] to have some degree of exchange rate flexibility.
However, dollarisation is a phenomenon that happens and you basically cannot decide tomorrow that you are not going to be dollarised. Because this is something that has already happened – basically… you have a lot of exports and this is the dynamics of the economy. What can be done is rather to promote the use of the national currency over the next years. Exchange rate flexibility is not something that is going to happen in one day.