2022 a year of tough trade-offs: IMF deputy managing director

The Covid-19 crisis is showing signs of easing, but the crisis in Ukraine presents a new set of headaches for leaders, raising concerns over the sustainability of economic growth.

May Kunmakara

May Kunmakara

The Phnom Penh Post


International Monetary Fund (IMF) deputy managing director Kenji Okamura. Heng Chivoan

June 9, 2022

PHNOM PENH – The Covid-19 crisis is showing signs of easing, but the crisis in Ukraine presents a new set of headaches for leaders, raising concerns over the sustainability of economic growth in the face of rising global commodity prices, especially for fuel.

This brings a fresh rash of challenges for the Cambodian economy, which could interfere with the Kingdom’s goal of attaining middle-income status by 2030 – just 14 years after it joined the lower middle-income group.

International Monetary Fund (IMF) deputy managing director Kenji Okamura recently sat down with The Post’s May Kunmakara to talk about the current challenges confronting the regional and global economies as well as possible strategies to guide Cambodia to next-stage development.

Could you provide a brief overview on the challenges facing the Asian and global economies?

The war in Ukraine has triggered a costly humanitarian crisis that demands a peaceful resolution, and the economic costs of war are expected to be large, and to spread through commodity markets, trade, and – to a lesser extent – financial interlinkages. Fuel and food price rises are already having a global impact, with vulnerable populations – particularly in low-income countries – most affected.

Global growth has been downgraded significantly in the April World Economic Outlook forecasts, from 6.1 per cent in 2021 to 3.6 per cent in 2022 and 2023. This is 0.8 and 0.2 percentage points lower for 2022 and 2023 than in the January World Economic Outlook (WEO) Update. Inflation is expected to remain elevated for longer than in the previous forecast, driven by commodity price increases and broadening price pressures.

In Asia, growth has been revised down by 0.5 percentage points compared to the January 2022 WEO update, with heterogeneity across the region. The largest contributor to the regional aggregate is China; the slowdown in growth because of more transmissible variants and a zero-Covid strategy has wide ramifications for Asia and for commodity exporters.

The war is affecting Asian growth through two main channels: one is through rising commodity prices, the other is through trade. The region has limited direct trade exposure to Russia, but considerable ties to the rest of Europe, and spillovers from Europe are expected. As food, metal and oil prices have spiked significantly, inflation projections for 2022 have been revised up to 3.2 per cent, 0.8 percentage points higher than in the January WEO.

What is IMF’s advice to policymakers to tackle those challenges?

Policymakers are facing difficult policy trade-offs: between tackling inflation and safeguarding the recovery, and between supporting the vulnerable and rebuilding fiscal buffers.

Although many drivers of inflation are beyond the control of central banks – the war, sanctions, the pandemic, supply chain disruptions – policymakers should be prepared to act quickly and decisively if the recovery strengthens faster than expected or if risks of rising inflation expectations become tangible.

Fiscal policy should depend on exposure to the war, the state of the pandemic, and the strength of the recovery.

Given limited fiscal space in some countries and improved health conditions, broad-based fiscal support introduced during the pandemic should be gradually removed, and targeted support to the vulnerable should be deployed, especially to protect from the effects of the spike in food and energy prices.

Where fiscal space is more limited, governments will need to tread a difficult path between fiscal consolidation and prioritising essential expenditures.

Policymakers should also continue to support positive structural change, by embracing the digital transformation the pandemic has accelerated, retooling and reskilling workers to meet its challenges, and supporting green investment to help mitigate climate change.

As a very open economy heavily reliant on international trade, should Cambodia worry about the growing ‘fragmentation’ in the world?

The Fund strongly believes in the value and virtue of trade, and free and fair trade. Trade has been very good for the world economy, especially for countries like Cambodia in Asia, which heavily depend on exports for growth, and maintaining its momentum is very important.

Over the medium term, the potential fragmentation of supply chains and geopolitical tensions is a big risk to a region that has benefitted from globalisation and relative peace over the last few decades.

What is the IMF’s view on Cambodia’s economic performance, outlook, key risks and potential policy responses?

We project Cambodia’s economy to grow at around five per cent this year, and gradually come back to around six-to-6.5 per cent in the medium term. This growth rate is relatively high, even for a developing country. The Cambodian recovery is so far being driven mainly by external demand for manufactured goods, particularly garments and footwear. The overall outlook is positive, but we see some challenges.

The most pressing challenges stem from global headwinds. Food and energy prices were already increasing. The war in Ukraine adds to those pressures and creates new uncertainty about consumer demand in Europe, one of the largest export markets for Cambodia.

Recent lockdowns in key manufacturing and trade hubs in China will likely compound supply disruptions elsewhere. Central banks especially in advanced economies may have to tighten financial conditions faster than previously expected, which will spill over to emerging market and developing economies.

On the domestic side, while credit growth has softened recently, we see some risks associated with the financial system having too many loans concentrated in the real estate and construction sector. So, the country needs to build buffers pre-emptively and to contain these risks in the financial system before they materialise.

Fortunately, Cambodia’s foreign exchange reserves are comfortable and should provide sufficient cushion against external shocks in the near term. That said, these global headwinds complicate policy-making in Cambodia – they make it harder to judge how much support is still needed for the economy.

The priority is still to protect the most vulnerable segments of the population. Targeted social support – such as through the cash transfer programme, which was extended in March – can shield the poorest against rising prices in crucial commodities.

Other support measures – such as measures to support credit and tax breaks – will have to be judged carefully, making sure that the economy is supported where needed but without using resources unwisely.

What steps should Cambodia take to reach the next stage of development by 2030, as an upper middle-income economy?

Cambodia’s growth has been impressive, but has relied on a narrow base, which is the garment industry. Tourism and related services are another important component of GDP (gross domestic product).

During the decade preceding the pandemic, real estate and construction sector also witnessed a boom, with growth in the double digits accompanied by large domestic credit expansion among households and firms.

Looking forward, Cambodia needs to diversify, both in terms of what it produces and countries to whom it exports its products. The diversification would make Cambodia less vulnerable to fluctuations in any one sector or export market.

To achieve that, Cambodia needs more investment in infrastructure and human capital and improvements in the business climate. This calls for, for example, more training to address specific skill needs of industry; lower transportation, energy, and logistics costs; strengthening the rule of law; and improving transparency of business regulations.

We are glad to see that the government has been taking initiatives to address those bottlenecks, for example through the new investment law adopted last year, in addition to the Industrial Development Policy.

Moreover, Cambodia’s young population creates both opportunities and challenges. The young and growing population provides long-term support to economic growth. The challenge is obviously to provide education and quality jobs for all of them.

So, we need to keep fostering investment, both domestic and foreign, in industries with higher value-added, so that this young labour force can have better-paying jobs and a brighter future. To achieve that, it is essential to continue preserving macroeconomic and financial stability, maintaining open investment and trade regimes, as Cambodia has done, and improving business climate and export competitiveness.

What role will IMF take to help emerging and developing countries, specifically Cambodia?

In general, the IMF aims to help emerging and developing countries through ensuring the stability and safety of the global financial system; monitoring developments in the global economy, and providing policy advice, financial assistance and capacity development.

During the Covid-19 crisis, we have overhauled our lending instruments serving developing countries, especially to address their needs for short-term and emergency support.

We also provided 650 billion SDR (Special Drawing Rights) allocations last year to benefit all members, including Cambodia. The new SDR allocation will address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy. It will particularly help our most vulnerable countries struggling to cope with the impact of the Covid-19 crisis.

We have an office in Phnom Penh, and Cambodia has been a major beneficiary of our work on capacity development. Our capacity development work is helping countries improve their public management. In the case of Cambodia, we have worked together in the areas of fiscal and monetary policy, financial sector issues, and statistics.

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