CAMBODIA ECONOMIC UPDATE JUNE 2022 WEATHERING THE OIL PRICE SHOCK ii TABLE OF CONTENTS ACKNOWLEDGMENTS ....................................................................................................................................... vi ABBREVIATIONS .................................................................................................................................................. vii EXECUTIVE SUMMARY ....................................................................................................................................... 1 Recent Economic Developments and Outlook ...................................................................................................... 5 Recent developments .................................................................................................................................................. 5 Coronavirus vaccination program accelerated further ........................................................................................... 5 Economic activity picked up ...................................................................................................................................... 5 Globally, three clouds have gathered over the economic horizon ...................................................................... 5 Goods exports accelerated and diversified .............................................................................................................. 7 Goods exports to the U.S. market continued to surge .......................................................................................... 8 Approvals of FDI projects picked up amid the reopening of the economy ...................................................... 9 Sluggish property development project activity continued ................................................................................... 9 Better weather conditions improved rice production .......................................................................................... 10 Rising ocean freight costs are hitting agricultural exports hard.......................................................................... 11 The CCFTA is expected to boost agricultural commodity exports................................................................... 12 Tourism activity has gradually recovered ............................................................................................................... 13 Domestic consumption recovered .......................................................................................................................... 13 Inflation reached 7.2 percent, hitting a 13-year high ............................................................................................ 13 The trade balance initially improved ....................................................................................................................... 15 The oil price shock is worsening the terms of trade ............................................................................................ 18 The exchange rate remained stable ......................................................................................................................... 18 Monetary conditions continued to be accommodative ....................................................................................... 18 Broad money growth partly recovered ................................................................................................................... 19 Domestic credit growth recovered, underpining economic recovery ............................................................... 20 The contribution of construction, real estate to credit growth eased ............................................................... 20 The cash transfer program continued to support households amid rsing inflation ........................................ 21 Revenue collection increased marginally ................................................................................................................ 22 The fiscal deficit is expected to remain relatively large at 6.6 percent of GDP ............................................... 22 Cambodia’s public debt-to-GDP ratio reached 35.0 percent of GDP by end-2021 ...................................... 23 Despite rising public debt, risk of debt distress remains low ............................................................................. 24 Outlook ....................................................................................................................................................................... 25 Challenges and risks................................................................................................................................................... 25 Policy options ............................................................................................................................................................. 25 Special focus: POST-PANDEMIC SUPPLY CHAIN DISRUPTIONS: STRATEGIES TO REDUCE LOGISTICS COSTS................................................................................................................................................. 28 EXECUTIVE SUMMARY ..................................................................................................................................... 28 Global Supply Chain Uncertainties in the Wake of the COVID-19 Pandemic ..................................... 31 Trade Flows and Supply Chain Configurations in Cambodia ................................................................... 33 Logistics Costs Per GDP in Cambodia ......................................................................................................... 42 Drivers of High Costs and Low Reliability .................................................................................................. 46 iii RECOMMENDATIONS........................................................................................................................................ 53 Annex S.1: Methodology for the Estimation of National Logistics Costs Per GDP in Cambodia ............. 59 References ................................................................................................................................................................... 62 Bibliography ................................................................................................................................................................ 64 Annex: Cambodia - Selected Indicators ................................................................................................................. 65 Boxes Box 1. Global economic developments and outlook Box 2. Potential benefits of the Regional Comprehensive Economic Partnership Box 3. Potential benefits of the Cambodia-China Free Trade Agreement Box S.1. The importance of estimating national logistics costs per GDP Box S.A.1. Data Source Box S.A.2. Methodology Figures Figure ES.1. Cambodia’s Recent Developments at a Glance Figure 1. Vaccinations accelerated Figure 2. Cambodia is one of best-performing countries for COVID-19 vaccination Figure B1. Global developments Figure 3. Goods exports accelerated Figure 4. Goods exports were increasingly driven by non-GTF products Figure 5. Goods exports to the U.S. market continued to surge Figure 6. Garment, travel goods and footwear exports to the U.S. market continued to accelerate Figure 7. Approved investment projects financed by FDI recovered Figure 8. Approved construction permits and construction material imports contracted Figure 9. Paddy rice production surged Figure 10. Better wet season rice production boosted total rice production Figure B2.1. Real income gains by country: Percentage change relative to business-as-usual scenario, 2035 Figure B2.2. Impact on trade: Percentage change relative to business-as-usual scenario, 2035e Figure 11. Weights of transport and communication component in CPI baskets and road densities Figure 12. Inflation of selected goods, labor, and fees accelerated Figure 13. The trade balance initially improved Figure 14. Cambodia is among the largest importers of refined oils Figure 15. Cambodia is among the largest exporters of rice and importers of fertilizers Figure 16. Broad money partly recovered Figure 17. Foreign direct investment inflows continued to hold up Figure 18. Weighted average U.S. dollar lending and deposit interest rates remained stable Figure 19. Credit growth recovered, while deposit growth remained eased Figure 20. The contribution of construction, real estate to credit growth eased Figure 21. Central government revenue marginally improved Figure 22. Central government expenditure also accelerated Figure 23. General government deficit widened Figure 24. Loan disbursements by creditors Figure S.1. Supply chain capacity stress (stalled ship capacity, million TEUs) and traffic delays (hours) through April 2022 Figure S.2. Shanghai Containerized Freight Index, weekly spot rates through March 2022 Figure S.3. Logistics costs: relative importance of reliability Figure S.4. Share of top 3 exporter destinations, US$ and gross weight, 2018‒2021 Figure S.5. Share of top 3 import origins, US$ and gross weight, 2018‒2021 Figure S.6. Exports to top destination, by sector, US$ and gross weight, 2018‒2021 Figure S.7. Imports from top countries of origin, by sector, US$ and gross weight, 2018‒2021 Figure S.8. Dynamics of total export/import, billion US$ and tons millions, 2018‒2021 Figure S.9. Dynamics of TCF GRVC exports, quarterly, 2018–2021 Figure S.10. Dynamics of TCF GRVC Imports, quarterly, 2018–2021 Figure S.11. PPAP and SAP Cargo Throughput, volume, 2018–2021 iv Figure 2.12. Main exit offices on export routes, by selected countries, volume and US$, 2018–2021 Figure S.13. SAP total number of port calls, 2019–April 2022 Figure S.14. SAP distribution of container traffic: arrivals and departures, monthly, 01/2020–04/2022 Figure S. 15. Cambodia’s container shipping connectivity Figure S.16. SAP port calls by destination country, number (outbound) Figure S.17. Main export routes by exit office, mode of transport, office of lodgment, and import region, gross weight and value, 2018–2021 Figure S.18. Main import routes by entry office, mode of transport, office of lodgment, and export region, gross weight and value, 2018–2021 Figure S.19. Royal Railways: export loaded and empty containers along Southern Line, quarterly, 2021 Figure S.20. Royal Railways: export loaded and empty containers along Northern Line, quarterly, 2021 Figure S.21. Transit traffic linking Vietnam and Thailand, gross weight, percentage, 2018–2021 Figure S.22. Transit trade fluctuations, gross weight, January 1, 2018–December 1, 2021 Figure S.23. Comparative logistics costs per GDP in selected ASEAN countries, 2020 Figure S.24. Evolution of Cambodia’s logistics costs since 2011 (Logistics costs per GDP) Figure S.25. Cambodia’s logistics costs and GDP growth rate at current prices (Percentage) Figure S.26. Cambodia – logistics cost structure Figure S.27. Cambodia – changes in inventory and household spending Figure S.28. Cambodia – logistics administration costs (Million riels) Figure S.29. Import of tractor units into Cambodia, and revenue collection, US$, 2017–19 Figure S.30. Average time spent at Sihanoukville Port, 2019–April 2022 Figure S.31. Phnom Penh Port Authority, revenue structure, 2020–2021 Figure S.32. Registration of exported goods, distribution across weekdays, volume, 2018–2021 Figure S.33. Sihanoukville Port CEB, registration of exported goods, daily distribution, value, 2021 Figure S.34. Regulatory quality in Cambodia and selected countries, 2010‒2020 Figure S.35. Export and import customs clearance – lane treatment, volume, and value, quarterly, 2018– 2021 Tables Table 1. China’s tariff reduction schedule under CCFTA Table 2. Cambodia’s main agricultural commodity exports to China Table B3.1. The Chinese tariff schedule, exports to the Chinese market, and domestic production Table 3. Macro outlook Table S.ES.1. Selected policy measure to foster logistics and supply chain reforms Table S.1. Import duties and fees for trucks Table S.2. Fuel consumption of tractor units Table S.3. Freight rates (road and rail) along selected origin-destination, cost/km, 2021 v ACKNOWLEDGMENTS The June 2022 Cambodia Economic Update The CEU, produced biannually, provides up-to- (CEU) was prepared by Sodeth Ly and Cordula date information on macroeconomic Rastogi, with contributions from Ekaterine developments in Cambodia. It is distributed and Vashakmadze, Runsinarith Phim, Ruth discussed widely including among Cambodian Banomyong, Paul Apthorp, Paitoon authorities, development partners, the private Varadejsatitwong, Daria Ulybina, Lucie Wuester, sector, think tanks, civil society organizations, Satya Prasad Sahu, Kimsun Tong, and Wendy and academia. Karamba. Chankesey Heav and Kimyean Ky served as research assistants. Saroeun Bou helped For information about the World Bank and its with the press release, web display, and activities in Cambodia, please visit our website at dissemination events. www.worldbank.org/cambodia. The team worked under the overall guidance of To be included in the email distribution list of the Sebastian Eckardt. The team is grateful for the CEU and related publications, please contact advice and comments provided by Maryam Chankesey Heav (cheav@worldbank.org). For Salim, Mariam Sherman, and Hassan Zaman. questions on the contents of this publication, Several colleagues provided comments on the please contact Saroeun Bou draft version including Aaditya Mattoo, Ergys (sbou@worldbank.org). Islamaj, Duong Trung Le, Ian John Douglas Gillson, Heidi Stensland, and Chanin The findings, interpretations, and conclusions Manopiniwes. expressed in this report do not necessarily reflect the views of the Executive Directors of the The team is grateful to the Cambodian World Bank or the governments they represent. authorities, particularly the Ministry of Economy The World Bank does not guarantee the accuracy and Finance and the National Bank of Cambodia, of the data included in this work. for their cooperation and support. The report also benefited from the advice, comments, and views of various stakeholders in Cambodia, including its enthusiastic readers and critics. vi ABBREVIATIONS ABC activity-based costing AEO Authorized Economic Operator ASEAN Association of Southeast Asian Nations ASYCUDA Automated System for Customs Data CBTA Cross Border Transport Agreement CCFTA Cambodia-China Free Trade Agreement CEB customs and excises branch CEO customs and excises office CEU Cambodia Economic Update COVID-19 coronavirus disease 2019 CPI Consumer Price Index CR Cambodian riel DPs development partners DWT deadweight tonnage EAP East Asia and Pacific region EMDEs emerging market and developing economies EU European Union FCDs foreign currency deposits FDI foreign direct investment FOB free on board FTA free trade agreement GACC China’s General Administration of Customs (China) GDCE General Department of Customs and Excise of Cambodia GDP gross domestic product GMS Greater Mekong Subregion GRVC global and regional value chains GSP Generalized System of Preferences GTF garment, travel, and footwear HS Harmonized System ICT information and communications technology I-O input and output LPCO Liquidity-Providing Collateralized Operation MAFF Ministry of Agriculture, Forestry and Fisheries (Cambodia) MDI Microfinance Deposit-Taking Institution MEF Ministry of Economy and Finance MLF Marginal Lending Facility MoC Ministry of Commerce MoI Ministry of Interior MoJ Ministry of Justice MPTW Ministry of Public Works and Transport MSME micro, small and medium-sized enterprise NLC national logistics cost NPL nonperforming loan NTM non-tariff measures PAPP Phnom Penh Autonomous Port PCR polymerase chain reaction PV photovoltaic vii RCEP Regional Comprehensive Economic Partnership SAD Single Administrative Document SAP Sihanoukville Autonomous Port SAR Special Administrative Region SEZ special economic zone TCF textile, clothing, and footwear UK United Kingdom U.S. United States US$ United States dollar YTD year to date y/y year on year viii RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK ix CAMBODIA ECONOMIC UPDATE JUNE 2022 million since the launch in June 2020, thus far EXECUTIVE SUMMARY helping to mitigate the negative impacts for poor and vulnerable households. Recent developments Cambodia is now weathering an oil price Higher commodity prices triggered by the war shock, just as the economy had started to in Ukraine are expected to lead to sizable fiscal recover amid a rollback of COVID-19-related impacts. First, additional budgetary spending may restrictions. The country imports 100 percent of be needed to mitigate the impacts of commodity its oil products, and its terms of trade have price movements, particularly on vulnerable worsened quickly as oil prices surged. Unlike last households and firms. Second, reduced revenue year, when the current account deficit widened collections are expected due to the negative growth significantly because of a surge in gold imports, impacts of high inflation and dampened aggregate this year’s negative terms of trade shock, caused by demand. Third, while the annual budget for 2022 oil price increases, is likely dampening consumer envisages countercyclical fiscal support with a confidence and corporate profitability, impacting projected fiscal deficit of 6.6 percent of GDP, aggregate demand. achieving the objectives and targets of the budget is increasingly challenging as costs of goods and Negative impacts of the oil price shock are services increase. Public investment project cost amplified by Cambodia’s already large overruns are likely amid surging inflation, and external imbalances. The country’s refined oil rising costs of inputs such as building materials, imports amounted to 6.2 percent of 2021 GDP – labor, and machinery. The higher deficit is larger than in most other East Asia and Pacific expected to be financed by drawdowns of economies – and around 11 percent of total government deposits (fiscal reserves), which stood imports. The trade deficit initially narrowed, as at 17.0 percent of GDP in February 2022, down gold imports declined. However, higher oil prices from 22.5 percent during the same period last year partially are offsetting the decline, placing upside and additional external borrowing. risks to the current account deficit. Moreover, Meanwhile, the “living with COVID-19” financing the deficit by capital inflows is being constrained by the zero-COVID-19 policy in strategy has enabled a reopening of the China, which is the largest source of foreign direct economy since late last year. International mobility has been further facilitated by the investment (FDI) for Cambodia. While reinstatement of the Visa on Arrival program and Cambodia’s international reserves remain relatively the removal, in March 2022, of the requirement for high, covering up to about 8 months of a negative COVID-19 test before arrival in prospective imports, external pressures will likely Cambodia. The roll back of restrictions was continue. enabled by the country’s successful vaccination Rising food and energy prices have eroded program. As of June 17, 2022, about 85 percent of household purchasing power. International oil the population have received two doses of coronavirus vaccine. The resurgence of infections price increases are passing directly through to caused primarily by the Omicron variant has domestic prices. Increases in fertilizer and food receded since April 2022. prices further stoke inflationary pressures. The relatively high weight of the transport component The economic recovery remains uneven. of 12 percent of the country’s Consumer Price Traditional growth drivers, especially the garment, Index (CPI) consumption basket exacerbates these negative impacts. Headline inflation quickly travel goods, and footwear manufacturing accelerated to 7.2 percent year on year (y/y) in May industries, continue to expand. Exports of the top three manufactured products, covering 65.4 2022, hitting a 13-year high, up from 3.0 percent percent of total merchandise (excluding gold) during the same period last year. Vulnerable and exports, grew at 25.1 percent in March 2022. The poor households in Cambodia are bearing the electrical, electronic, and vehicle parts brunt of these increases, with limited recourse to manufacturing industries are rebounding slowly. savings. Therefore, the cash transfer program, Production of rice, Cambodia’s main crop, which has been the largest component of the government’s fiscal support package, will continue accounting for close to 60 percent of agricultural to be needed. As of February 2022, the program GDP, rose by 9.3 percent during the 2021‒22 rice covered 690,000 households (2.7 million production year, reaching 12.2 million metric tons. individuals) or approximately 19 percent of The service sector, especially the travel, tourism, households. The program has disbursed US$593 and hospitality industries, is recovering, 1 CAMBODIA ECONOMIC UPDATE JUNE 2022 underpinned initially by a revival of domestic of Korea free trade agreement is ratified. However, demand and domestic tourism but remains below the negative impacts of the coronavirus on jobs per-COVID-19 levels. and welfare are expected to continue as the services sector, especially the travel, tourism, and The construction sector, which was one of hospitality industries, continue to face persistent growth drivers during the pre-pandemic headwinds. period, also remains under pressures. In March 2022, the value and area of approved construction Challenges and risks permits plummeted, contracting by 66.0 percent and 67.9 percent, respectively. During the same Risks to the forecast are tilted to the downside. period, cement, and steel imports, mainly used for Despite stronger domestic economic activity the construction industry, contracted in volume supported by the rollback of mobility restrictions, terms by 71 percent and 15.6 percent, respectively. recovery has been held back by deterioration of global demand conditions and the global Monetary conditions continued to be commodity price shock. An unmanageable accommodative. Broad money growth eased, resurgence of Omicron or new variants could growing at 13.8 percent in March 2022, declining disrupt economic recovery. While Cambodia from 20.3 percent during the same period last year. maintains policy space that it could deploy should Private sector deposit growth continued, these risks materialize, its fiscal buffers have expanding at 15.3 percent. Supporting economic shrunk, after years of fiscal intervention. In recovery, domestic credit growth accelerated to addition, high credit growth and concentration of 22.4 percent in March 2022, up from 21.1 percent domestic credit in the construction and real estate during the same period last year. Supported by sector remain a key risk to Cambodia’s financial central bank open market operations, the nominal stability. exchange rate continued to be broadly stable, hovering at riel 4,100 per U.S. dollar. Gross Policy options international reserves increased marginally, reaching US$20.3 billion (8 months of imports) in To sustain recovery momentum, efforts to March 2022, down from US$20.2 billion during contain COVID-19 infections must continue. the same period last year. Supported by the World Health Organization, the authorities are building surveillance with Outlook community engagement to strengthen early detection. In addition, guidelines on the Cambodia’s real growth is projected to reach integration of COVID-19 services into a single 4.5 percent in 2022. The relatively subdued healthcare system have been introduced, and all growth projection reflects anticipated impacts of healthcare facilities have been advised to the negative terms of trade shock caused by rising implement the guidelines throughout the country. oil prices, a cyclical slowdown in the United States and China, Cambodia’s main trading partners. In Given that external demand conditions will addition, the path of the economy continues to remain uncertain, the immediate next steps depend on the course of the virus. Thanks to are to further strengthen domestic market continued progress on vaccinations, further confidence. It is therefore important to promote relaxations of travel restrictions support continued investor confidence at home to boost domestic gains in economic activity and employment. economic activity. Taking advantage of the newly Domestic economic activity and agricultural rehabilitated road networks in Siem Reap and commodity exports are expected to remain robust, Sihanoukville, as well as the Phnom Penh- contributing to economic recovery. Sihanoukville Expressway (which is expected to be completed and launched in the second half of Over the medium term, the economy is 2022), further attracting private investment in the expected to trend back to potential, growing at tourism sector, while implementing tourism around 6 percent. The new Law on Investment, development strategies such as the Siem Reap together with the newly ratified Cambodia-China Tourism Development Masterplan for 2021‒35, Free Trade Agreement and Regional will help. As long as the country continues to relax Comprehensive Economic Partnership, is all travel restrictions, including visa facilitation expected to boost investment and trade in the without COVID-19 resurgence, international coming years. Similarly, trade and investment will arrivals should return, contributing to the revival be further boosted when the Cambodia-Republic of the tourism and hospitality industry. 2 CAMBODIA ECONOMIC UPDATE JUNE 2022 the export sector to revive external More efforts are needed to promote competitiveness. In addition, an important policy agricultural commodity exports to maximize consideration is to take advantage of continued the benefit of the newly ratified bilateral and FDI inflows. Backward linkages between the FDI multilateral free trade agreements, namely the sector and the domestic small and medium-sized Cambodia-China Free Trade Agreement (CCFTA) enterprise (SME) sector must be further fostered and the Regional Comprehensive Economic to boost job creation and growth. Partnership (RCEP). In this regard, incentives currently introduced under the new investment law Depending on the magnitude of the oil price to support agroprocessing and agricultural value shock, measures to mitigate its negative chains could play a key role. While Cambodia’s impacts may need to be introduced. Targeted agricultural commodity prices at farmgate remain relief and support are likely to be more cost- competitive, interest rates on loans, costs of energy effective than a blanket and broad-based for agroprocessing industries, and logistics and petroleum tax reduction measure. In this transportation costs for agricultural commodity connection, it is important to consider more exports are not. Unlike electronics, equipment, and targeted social assistance measures that directly parts, agricultural commodities are heavy and mitigate the impacts on those most in need, relatively cheap cargos, which are being affected especially vulnerable households, poor farmers, disproportionally by rising ocean freight costs. and small and micro household enterprises. Therefore, further efforts must be made to strengthen trade facilitation, while implementing Rising inflationary pressures are posing multimodal transport connectivity. This is serious policy challenges for the Cambodian particularly crucial for Cambodia’s agricultural authorities. To this end, it is crucial for the central commodity exports if the country is committed to bank to continue to be committed to maintaining taking full advantage of the CCFTA and RCEP. exchange rate stability. For the government, it is (See the Special Focus Section on Post-pandemic important to avoid creating excess aggregate supply chain disruptions: strategies to reduce demand, which might trigger undue domestic logistics costs.) inflationary pressures on top of the imported inflation. The prospect of a protracted period of At the same time, it is essential to continue high inflation and a sharp increase in global interest addressing supply-side bottlenecks by reducing rates has significant implications for Cambodia, the costs of doing business, energy, and licensing, whose economy is highly dollarized. while promoting access to finance, especially for 3 CAMBODIA ECONOMIC UPDATE JUNE 2022 FIGURE ES.1. CAMBODIA’S RECENT DEVELOPMENTS AT A GLANCE Real growth continues to gradually recover… …As goods exports accelerated, surpassing pre- Real growth (percent) pandemic levels... (YTD, y/y, percent change) 35 10.0 Historical average (5 years) Exports 30 GDP growth Historical average (5 years) 8.0 25 6.0 20 15 4.0 10 2.0 5 0.0 0 -2.0 -5 -10 -4.0 May-20 May-21 Sep-20 Nov-20 Sep-21 Nov-21 Mar-20 Mar-21 Mar-22 Jul-20 Jul-21 Jan-20 Jan-21 Jan-22 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021e 2022p 2023p 2024p Approved FDI project value is rising… …But the oil price shock posed a serious challenge, (YTD, y/y percent change) resulting in surging inflation (y/y percent change) 350 YTD, y/y percent change 8 Headline inflation (y/y) 300 Historical average (5 years) 7 250 6 200 150 5 100 4 50 0 3 -50 2 -100 1 -150 Sep-19 Sep-20 Sep-21 Mar-19 Jun-19 Dec-19 Mar-20 Jun-20 Dec-20 Mar-21 Jun-21 Dec-21 Mar-22 0 May-13 Apr-16 May-20 Aug-11 Sep-15 Nov-16 Aug-18 Mar-12 Dec-13 Jun-17 Mar-19 Dec-20 Oct-12 Jul-14 Feb-15 Oct-19 Jul-21 Feb-22 Jan-11 Jan-18 Broad money (M2) growth remained …And credit growth picked up as demand accommodative… strengthened Broad money liabilities (y/y percent change) (y/y percent change) 60 60 Credit to the private secor (y/y) 50 M2 y/y, percent change 50 Historical average (5 years) Historical average (5 years) 40 40 30 30 20 20 10 10 0 0 May-15 Apr-18 Aug-13 Sep-17 Nov-18 Aug-20 Mar-14 Dec-15 Jun-19 Mar-21 Oct-14 Jul-16 Feb-17 Oct-21 Jan-13 Jan-20 May-13 May-14 May-15 May-16 May-17 May-18 May-19 May-20 May-21 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Sep-21 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Sources: Cambodian authorities; World Bank staff estimates and projections Note: e = estimates; p = projection; YTD = year to date; y/y = year on year. 4 CAMBODIA ECONOMIC UPDATE JUNE 2022 RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK caused primarily by the Omicron variant, daily Recent developments infections receded to zero in June 2022, down from Coronavirus vaccination program about a dozen cases daily in April 2022, and the peak of 736 cases on February 20, 2022. As of June accelerated further 17, 2022, there were 136,262 cases and 3,056 Cambodia continues to refine its pandemic deaths. control policies to lift restrictions while preserving public health. As of June 17, 2022, about 85 percent of the Cambodian population had Economic activity picked up received two doses of coronavirus vaccine (figure Cambodia has shifted to a strategy of “living 1), and about 53 percent had received a booster. with COVID-19,” enabling a broad-based Cambodia is one of best-performing countries for economic recovery to take shape. Thanks to the COVID-19 vaccination (figure 2) and ranks third rollback of mobility restrictions made possible by among Association of Southeast Asian Nation Cambodia’s high vaccination rate, economic (ASEAN) countries. The country continues to rely recovery picked up pace during the first quarter of on testing-tracing-isolation to prevent or detect 2022, driven by domestic economic activity, further outbreaks early enough to control them. especially domestic consumption, and merchandise Supported by the World Health Organization, exports. The economic recovery, however, remains the authorities are building surveillance with uneven. Despite a general slowdown in global community engagement to strengthen early demand, Cambodia’s goods exports continue to detection. In addition, guidelines on the remain at a sustained robust growth rate. The integration of COVID-19 services into a single service sector, especially the travel, tourism, and hospitality industries, is recovering, underpinned healthcare system have been introduced, and all initially by a revival of domestic demand and healthcare facilities are advised to implement the domestic tourism. The construction sector, guidelines throughout the country. In March especially the property market and real estate 2022, Cambodia reinstated the Visa on Arrival industry, however, remains sluggish. program and abolished the need for a negative polymerase chain reaction (PCR) test obtained 72 hours before arrival the country. In April 2022, Globally, three clouds have gathered (outdoor) mandatory mask wearing was lifted. over the economic horizon Just as the East Asia and Pacific (EAP) region Thanks to the country’s successful vaccination was weathering the recurrent COVID-19 program, COVID-19 infections have subsided storms, three clouds have gathered over the since April 2022. After a spike in February 2022, economic horizon. 1 First and most recently, Figure 1. Vaccinations accelerated Figure 2. Cambodia is one of best-performing (Millions of population, as of June 17, 2022) countries for COVID-19 vaccination (June 16, 2022) 5 years 6-11 years 12-17 years ≤ 18 years % of population (RHS) 20 100 80 15 60 10 40 5 20 0 0 1st dose 2nd dose 3rd dose 4th dose Source: Cambodian authorities. Source: Our World in Data. Note: RHS = right-hand scale; total population is approximately 17 million. 1 World Bank 2022b. 5 CAMBODIA ECONOMIC UPDATE JUNE 2022 Box 1. Global economic developments and outlook1 According to the January 2022 edition of the World Bank’s Global Economic Prospects report, global growth was expected to decelerate markedly, from 5.5 percent last year to 4.1 percent this year, amid lingering supply bottlenecks, the withdrawal of policy support, and rising inflation, particularly for food and energy. The war in Ukraine is expected to accelerate the slowdown and contribute to higher global inflation. The Organisation for Economic Co- operation and Development (OECD), for example, estimates global growth will be more than 1 percentage point lower, and global inflation at least 2.5 percentage points higher, than pre-conflict projections. Financial market volatility has also increased, contributing to a sharp tightening of global financial conditions, as the war in Ukraine soured the appetite for risk. Meanwhile, citing a tight labor market and elevated inflation, the Federal Reserve increased policy rates by 75 basis points in two consecutive hikes. The market, since early April, has been pricing around 30 basis points of additional tightening in 2022 in both the United States and the euro area. Advanced-economy government bond yields have continued to rise rapidly – the U.S. 10-year yield approached 3 percent in early May, a level last seen in 2018 (figure B1.1, panel A). The war and the associated severe economic sanctions imposed on Russia contributed to a further increase of commodity prices, especially for commodities where Russia and Ukraine are key exporters, including, fertilizers, fuels, metals, and wheat. Natural gas prices in Europe more than doubled in the aftermath of the invasion, amid supply uncertainty, as Europe remains heavily reliant on Russian imports of natural gas. Gas prices have fallen back lately but remain 40 percent higher than in mid-February. Coal prices also rose sharply as several European countries announced plans to increase coal-powered electricity generation and build stockpiles. Several metal prices reached all-time highs in March, including aluminum, nickel, and palladium, due to concerns over metal supply. Wheat prices increased by 40 percent, reaching record highs (figure B1.1, panel B). The war in Ukraine is having a large negative impact on the Europe and Central Asia region due to tight regional economic and financial linkages – Russia alone accounts for about 40 percent of regional GDP. The war is also expected to adversely affect other emerging markets and developing economies (EMDEs), particularly commodity-importing economies, which have experienced a rapid increase in sovereign spreads since the war started. As central banks in advanced economies begin to reduce monetary accommodation, capital flow volatility and currency depreciation may pose additional challenges to EMDE policymakers. Higher prices could weigh on consumer confidence and erode real earnings. Growth in the EAP region is projected to decelerate from 7.2 percent in 2021 to 5 percent in 2022, which is half a percentage point slower than expected in October 2021. The slowing growth will be mostly due to China, where growth will slow to 5 percent in 2022, after the 8.1 percent rebound in 2021. Even though growth in the rest of the region is projected to rebound to 4.8 percent in 2022 from 2.6 percent growth in 2021, the acceleration will be less than the 5.2 percent expected in October 2021. Risks to the outlook are tilted to the downside. Under the low-case scenario, which assumes more persistent COVID-19 outbreaks, regional growth in 2022 could decline to 4.0 percent. Rising borrowing costs, combined with high debt levels and the rapid rise in non-concessional debt across many EMDEs, increase the risk of financial stress. The pandemic has exacerbated an unprecedented debt boom across EMDEs, with debt of all types rising to multidecade highs. Looking forward, EMDE policymakers will need to balance macroeconomic support with bolstering fiscal sustainability. As EMDEs have limited policy space to provide additional support if needed, these downside risks heighten the possibility of a hard landing – a much sharper slowdown in growth than currently envisioned. Figure B1.1. Global developments Panel A. CPI and 10-year treasury note yield in U.S. Panel B. Commodity prices Percent CPI Index. Nominal term, 2010 = 100 10-Year Treasury Note Yield (RHS) 3.0 170 Energy 10 Agriculture 8 2.5 140 Metals&Minerals 2.0 6 1.5 110 4 1.0 80 2 0.5 0 0.0 50 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 20 Apr-13 Apr-16 Apr-19 Apr-22 Source: Haver Analytics; World Bank. Note: 1 This box was prepared by Ekaterine Vashakmadze, Prospects Group. 6 CAMBODIA ECONOMIC UPDATE JUNE 2022 shocks emanating from the war in Ukraine are addition, increased domestic and international disrupting the supply of commodities, increasing competition could strengthen incentives for financial stress, and dampening global growth. productivity-enhancing technology adoption. Second, U.S. inflation ignited by the stimulus-led rebound and persistent supply disruptions could Goods exports accelerated and provoke faster-than-anticipated financial tightening, perhaps timely in the United States but diversified too early in many EAP countries, where recovery is Despite an anticipated slowdown in global incomplete. Third, China’s cyclical slowdown, demand, Cambodia’s merchandise exports deleveraging of the real estate sector, and COVID- accelerated further. During the first quarter of 19 resurgence amidst zero-COVID policies, could 2022, goods (excluding gold) exports rose to dampen regional exports (see box 1 for more US$4.8 billion (figure 3), growing at 26.5 percent discussion on global and regional economic year on year (y/y), surpassing its pre-pandemic developments and outlook). growth rate, which peaked at 25.5 percent in January 2020. The manufacturing exports of the These global and regional developments are top three items, which are garment, travel goods, affecting Cambodia. Negative terms of trade and footwear (GTF) products, reached US$3.1 shock, compounding inflationary pressures are billion, or a 25.2 percent increase y/y. Moreover, dampening domestic economic activity. Continued the prospects of garment orders remain strong until sluggishness of international tourism, especially the end of the year. Reflecting initial success in from China slows recovery of the services sector, diversifying product exports, the share of the GTF while risks of weakening external demand are product exports noticeably declined to 64.5 percent rising. of total merchandise exports in 2022, down from 77.6 percent in 2019 (figure 4). The main policy To mitigate the risks, countries in the region measures introduced by the authorities to diversify are advised to enhance the efficiency of fiscal exports are the newly introduced Law on policy for recovery and growth for more efficient Investment and recently launched Economic and targeted support to households and firms, Recovery Plan (ERP) for 2021–23. The new Law while creating space for investment in the on Investment may help improve worker infrastructure of trade, energy, and technology productivity, given the incentives it offers on the diffusion. It is crucial to strengthen provision of skills training, housing, nurseries, macroprudential policies to mitigate risks from health facilities, and transportation services to global financial tightening. Monetary policy must workers. Incentives provided to research, remain alert to new inflationary pressures but at development, innovation, and machinery present can continue to support recovery. In modernization may also promote new technology Figure 3. Goods exports accelerated Figure 4. Goods exports were increasingly driven (US$ million) by non-GTF products (% share) Other products Agricultural commodities GTF Non-GTF manufacturing Wood products Non-GTF manufacturing Wood products Agricultural commodities GTF Total Other products 5,000 4,814 100 90 6.3 4,000 6.5 3,806 80 5.8 6.5 8.0 6.9 3,525 426 70 7.5 8.9 3,208 3,000 60 230 287 187 50 2,000 40 77.6 75.0 3,104 30 65.2 64.5 2,489 2,645 2,480 1,000 20 10 - 0 3m-2019 3m-2020 3m-2021 3m-2022 3m-2019 3m-2020 3m-2021 3m-2022 Source: Cambodian authorities. Source: Cambodian authorities. Note: GTF = Garment, travel goods, and footwear. Note: GTF = Garment, travel goods, and footwear. 7 CAMBODIA ECONOMIC UPDATE JUNE 2022 adoption and transfers. The ERP aims to build the US$421 million (8.8 percent of total goods exports) foundation for economic growth, targets or a 33.2 percent y/y increase. There has been only diversification and competitiveness, while further a marginal increase in the minimum wage to deepening investment climate and doing business US$194 a month in 2022, up from US$192 a month reforms. in 2021. The marginal increase helps support Cambodia’s external competitiveness during the Exports of non-GTF manufacturing products, time of COVID-19. which include bicycles, vehicles, and electronical parts and cables, also accelerated, Goods exports to the U.S. market reaching US$426 million, or a 48.4 percent y/y increase. Its share rose to 9 percent of total goods continued to surge exports in 2022, up from 5.8 percent in 2019. Cambodia’s merchandise exports to the Exports of agricultural commodities, which mainly United States continued to surge. Goods include rice, rubber, banana, and sugar, accounting exports destined for the U.S. market reached another 9 percent of total goods exports, reached US$2.1 million, with a whopping y/y rise of 43.7 US$331 million (see detailed discussion on percent during the first three months of 2022, agricultural commodity exports in the agriculture despite expiration of the U.S. Generalized System section, below). of Preferences (GSP) program on December 31, 2020, reauthorization of which is pending U.S. Garment exports remained Cambodia’s largest congressional approval. 2 Since 2020, the United export item. Garment exports reached US$2.1 States has been Cambodia’s largest export market billion, or a 20.4 percent y/y increase during the (figure 5). The share of the U.S. market in total first quarter of 2022. Despite its accelerated growth goods exports rose quickly to 44.7 percent in 2022, rate, garment exports no longer account for the from 27.6 percent in 2019 at the expense of that of majority of goods exports. Its share declined from the European Union (EU) market, which declined 60 percent in 2019 to 44.4 percent of total goods to 19.2 percent from 28.1 percent during the same exports in 2022. Exports of travel goods surpassed period, partly affected by the partial withdrawal of those of footwear products and became the the EU’s Everything But Arms preferential second-largest item, accounting for US$468 million treatment, effective August 12, 2020 (affecting (9.7 percent of total goods exports), with a approximately 20 percent of Cambodia’s exports to whopping y/y rise of 46.5 percent, followed by the EU). 3 The third-, fourth-, and fifth-largest exports of footwear products, which reached Cambodian goods export markets are China, Japan, Figure 5. Goods exports to the U.S. market Figure 6. Garment, travel goods and footwear continued to surge exports to the U.S. market continued to accelerate (% share) (US$ million) U.S. EU China Japan ASEAN UK ROW 2,500 Garment Travel goods Footwear Bicycle Wood products Others 100 Parts and cables 90 2,000 80 70 1,500 60 19.2 50 18.9 1,000 24.8 40 28.1 30 500 20 39.3 44.7 34.4 27.6 10 - 0 3m-2019 3m-2020 3m-2021 3m-2022 3m 2019 3m 2020 3m 2021 3m 2022 Source: Cambodian authorities. Source: Cambodian authorities. Note: ROW = rest of the world. 2 See https://www.cbp.gov/trade/priority-issues/trade- 3 For more details, please see agreements/special-trade-legislation/generalized-system-preferences. https://trade.ec.europa.eu/doclib/press/index.cfm?id=2113. 8 CAMBODIA ECONOMIC UPDATE JUNE 2022 and the United Kingdom (U.K.), which account for non-garment manufacturing industries (figure 7). 6.7 percent, 6.3 percent, and 4.1 percent, Of the US$552 million approved FDI project respectively. Cambodia’s goods exports to the rest value, the energy sector received US$397 million, of the world account for 12.4 percent of the total, reflecting rising demand for energy for of which the majority (7.4 percent) are destined for diversification in manufacturing (beyond ASEAN member countries. garments). The garment and agriculture sectors obtained US$89 million and US$28 million, For the U.S. market, garment and travel goods respectively. Agricultural commodity exports are are the two largest export items, accounting for being strengthened by foreign investment in fruit 39.7 percent and 17.4 percent, respectively (banana and mango) plantations and packaging to (figure 6). While garment exports have been the top take advantage of the CCFTA. China, which export item for decades, travel goods product includes mainland China; Hong Kong SAR, China; exports have emerged since the U.S. expanded Macau SAR, China; and Taiwan, China, remains the duty-free access to cover travel goods made in largest foreign investor in Cambodia, accounting Cambodia under its U.S. GSP scheme in 2016. 4 In for about 67.6 percent of total approved FDI 2021, the duty-free access scheme expired, and its project value in 2022. Unlike during the pre- renewal is pending U.S. Senate approval. Still, the pandemic period, foreign investors’ appetite for exports of travel goods products to the U.S. market investing in large-scale tourism development continued to surge. The third-largest item is wood projects seem to have virtually ceased. products, accounting for 7.2 percent of total exports. The exports of combined vehicle and Sluggish property development electronic parts and cables are still emerging, accounting for 5.1 percent. Exports of bicycles project activity continued captured 4.8 percent. The pandemic hit residential construction activity hard. In 2022, only 5 percent of the Approvals of FDI projects picked up expected supply of new condominium units were completed in the first quarter. 5 New launches have amid the reopening of the economy slowed as the market tries to absorb the remaining stock. Average sale prices of high-end Approved (fixed asset) FDI project value condominiums continued to slide, while the prices investing in the real sector accelerated, of affordable and midrange condominiums reaching US$552 million or 162.6 percent y/y stabilized. The condominium market was initially during the first quarter of 2022, largely financing driven by foreign demand, given that locals were Figure 7. Approved investment projects financed by Figure 8. Approved construction permits and FDI recovered construction material imports contracted (fixed assets, US$ billion) (YTD, y/y percent change) Others Tourism 300 Non-garment manufacturing Garment 250 Construction permit value 1.0Agriculture 200 Basic materials (steel and cement) imports volume 0.8 150 100 0.6 50 0.4 0 0.2 -50 -100 0.0 May-19 May-20 May-21 Sep-19 Nov-19 Sep-20 Nov-20 Sep-21 Nov-21 Mar-19 Mar-20 Mar-21 Mar-22 Jul-19 Jul-20 Jul-21 Jan-19 Jan-20 Jan-21 Jan-22 3m-2019 3m-2020 3m-2021 3m-2022 Source: Cambodian authorities. Source: Cambodian authorities. Note: YTD = year-to-date. 4 See https://www.voanews.com/a/us-expands-duty-free-access- 5 Q1 2022 Market Insight, CBRE Cambodia; travel-goods-cambodia/3406621.html. https://images.cbre.com.kh/2021/10/20220407-Presentation- Figures-2022-Q1-For-circulation.pdf. 9 CAMBODIA ECONOMIC UPDATE JUNE 2022 relatively new to living in high-rise residential to struggle as international arrivals remain nowhere buildings. When the pandemic hit, foreign demand near the pre-pandemic levels. While prospects was interrupted. As a result, most FDI-financed remain uncertain, property booms, backed by property investment, especially in high-rise entertainment industries, namely casinos and development projects in the urban centers such as resorts such as those in Sihanoukville, may occur Phnom Penh and Sihanoukville, were suspended. once the pandemic (and China’s zero-COVID-19 Excess supply may have resulted in reduced foreign policy) is behind us. After the moratorium on new investor appetite for investing in property casino permits in 2019, a Law on Management of development projects. Approved FDI financing of Commercial Gambling was promulgated in property and real estate development declined from November 2020, the first article of which aims to US$1.78 billion in 2019 to US$142 million in 2020. boost the economy, bolster tourism, collect Reflecting sluggish demand in the property and real revenue, and establish social safety and security. In estate market, approved construction permit value October 2021, the authorities issued a Prakas contracted by 66.0 percent (figure 8) during the first (regulation) on legal and regulatory requirements three months of 2022. Similarly, approved for obtaining, transferring, and extending casino construction permit area contracted by 67.9 and gambling licenses.6 Several ongoing large percent y/y. During the same period, the volumes infrastructure projects mostly financed by public- of basic construction material (cement and steel) private partnerships are being built to support the imports mainly used for the construction industry tourism industry. Those include the new (US$2.0 contracted by 37.5. billion) Phnom Penh-Sihanoukville Expressway, a new (US$1.5 billion) Phnom Penh international For several years preceding the crisis, the airport, a new (US$880 million) Siem Reap construction and real estate sector had been international airport, and a new Koh Kong the largest engine of growth, contributing more international airport (US$350 million). than a third of GDP growth. Sihanoukville was one of Cambodia’s urban centers that experienced the Better weather conditions improved most rapid construction boom during the pre- pandemic period. The seaside provincial capital rice production received US$5.8 billion of approved construction In 2021, total rice production surged, reaching projects in 2019–20. As a result, it was transformed 12.2 metric tons, marking a 11.6 percent y/y into an investment boomtown, initially backed by a increase. The surge was driven largely by an casino industry. Currently, tourism-dependent increase in wet season rice production, thanks to cities such as Siem Reap and Sihanoukville continue more favorable weather conditions. 7 Of a 12.2 Figure 9. Paddy rice production surged Figure 10. Better wet season rice production (In millions of metric tons) boosted total rice production (In millions of metric tons) 14 Dry season 14 1.4 Wet season 1.2 2021 2020 2019 2018 12 Total (y/y percent change, RHS) 12 1.0 10 10 0.8 8 0.6 8 6 0.4 6 0.2 4 4 0.0 2 -0.2 2 0 -0.4 by Land by Yield by Land by Yield Total 0 -2 Wet production Dry production Total wet 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 increase contributed increase contributed and dry seasons Source: Cambodian authorities. Source: Cambodian authorities. Note: RHS = Right-hand scale. 6 Prakas No. 002, date October 21, 2021. 7 Annual Report for 2021‒22, Ministry of Agriculture, Forestry and Fisheries. 10 CAMBODIA ECONOMIC UPDATE JUNE 2022 million metric ton rice production, wet season rice Rising ocean freight costs are hitting contributed 9.26 million metric tons (76 percent) and dry season rice production contributed 2.93 agricultural exports hard million metric tons (24 percent) (figure 9). Rising oil prices are hurting exports of According to the U.S. Department of Agriculture agricultural commodities. Unlike electronics, Foreign Agriculture Service, the production year garments, travel goods, and footwear, agricultural 2021‒22 was positive for rice farming thanks to commodities are heavy and relatively cheap cargo, better weather conditions coupled with increased which are being affected disproportionally by rising adoption of new technologies, such as the use of ocean freight costs due to supply chain disruptions drones to efficiently spray pesticides. 8 (shortage of empty containers), caused by the pandemic, and the oil price shock, triggered by the Three-quarters of the increase, or about 1 war in Ukraine. According to the Cambodia Rice million metric tons, were contributed by wet Federation, trucking costs to Cambodia’s main season rice production expansion, while a ports recently increased by 10 to 20 percent. The quarter was contributed by dry season rice (figure freight costs are now unpredictable, depending on 10). Better weather conditions allowed for increases the volatility of oil prices. Long-distance freight has in rice cultivated and harvested areas which been particularly hard hit. Despite the end of the expanded to 3.6 million hectares and 3.4 million trade safeguard measures imposed by the EU on hectares in 2021, respectively, up from 3.4 million Cambodian rice in January 2022, 9 saving rice hectares and 3.2 million hectares in 2020, exporters €125 per metric ton, the high ocean respectively. In addition, increased adoption of new freight rates, which have increased several times in technologies and seeds boosted wet and dry season the past few years, will continue to dampen rice yields to 3.5 metric tons per hectare and 4.5 Cambodia’s rice exports to the EU market. metric tons per hectare in 2021, respectively, up Agricultural commodity exports to long-distance from 3.3 metric tons and 4.4 metric tons in 2020, market destinations such as the European market respectively. The major non-rice agricultural are estimated to have declined by 30 percent. (See products are rubber and cassava. In 2021, rubber the Special Focus Section on Post-pandemic supply production reached 0.4 million metric tons or an chain disruptions: strategies to reduce logistics 8.3 percent increase, while cassava production costs.) reached 14.7 million metric tons or a 16.1 percent increase. Rubber and cassava ranked second and Similarly, negative impacts of China’s zero- third in terms of agricultural commodity product COVID-19 policy affect non-rice agricultural value and exports, after rice. commodity exports, especially banana and mango, which have just emerged as promising Production and exports of mangos and products. The policy hits mango and banana bananas are showing promising signs. Several products exported inland via Vietnam to China fresh fruit products, especially mango and yellow hardest. The policy causes delays and congestion, banana, are emerging. Yellow banana is now one of resulting in spoiled and undelivered products. the most promising non-rice agricultural products Direct exports via seaports to China are even with exports increasing to US$168 million in 2021, tougher. Due to increased freight rates of up from US$112 million in 2020 (and US$49 refrigerated containers, imported fruits from million in 2019). In the first three months of 2022, Cambodia become less competitive against yellow banana exports accelerated further, reaching domestically produced fruits in China, discouraging US$59 million. Mango products are also slowly Chinese importers from importing fruits from emerging. Exports of mangos reached US$10 Cambodia. million in 2021. The oil price shock has started to affect agricultural production, as the prices of fertilizer and pesticide have increased. As a result, farmers have to increase prices of their 8 See https://apps.fas.usda.gov/newgainapi/api/Report/DownloadReport 9 The European Union imposed safeguard measures on rice from ByFileName?fileName=Grain%20and%20Feed%20Annual_Phnom Cambodia. On January 18, 2019, the European Union reinstated the %20Penh_Cambodia_CB2022-0001 for details. normal customs duty on Cambodia’s rice products of €175 per ton in year one, progressively reducing it to €150 per ton in year two, and €125 per ton in year three (https://trade.ec.europa.eu/doclib/press/index.cfm?id=1970). 11 CAMBODIA ECONOMIC UPDATE JUNE 2022 agricultural products, especially paddy rice prices, As discussed in box 2, Vietnam, Malaysia, and to compensate for the increases of input costs. To Cambodia are among the countries that benefit cope with the oil price shock, some farmers are most under the “full” scenario, with reductions in now switching to other crops that are more tolerant tariffs, non-tariff measures, trade costs, and to climate change and pests, and to high-value productivity increases. In most countries, there is a crops, in order to survive. significant impact when trade costs are reduced. For Japan, most gains are associated to a fall in Nevertheless, rice exports to China have tariffs, in contrast to the rest of the countries, improved somewhat this year, thanks to the where the fall in tariffs reports very slight results, or memorandum of understanding signed between even a negative impact, as is the case of Cambodia. China and Cambodia to purchase around 400,000 The CCFTA covers more than 10,800 tariff lines metric tons of rice in 2022. The relatively good for Cambodia and about 8,500 tariff lines for performance of the Chinese market has helped China. The CCFTA goes beyond what was offered cushion Cambodia’s rice exports. As a result, milled under the ASEAN-China FTA, covering an rice exports marginally improved during the first additional 340 tariff lines (4 percent of the total), four months in 2022, reaching 0.22 million metric which includes mostly chapters 1 to 10 of tons, or a 14.8 percent y/y increase. They, however, Cambodia’s ASEAN Harmonized Tariff remain well below the 0.3 million metric tons Nomenclature, ranging from live animals/animal exported during the same period in 2020. products to meat, fish, and cereals. Since January 1, 2022, about 98 percent of China’s tariff lines have The CCFTA is expected to boost immediately gone to zero tariff rates (see box 3 for agricultural commodity exports more details). Of the 340 commodities, 95 percent are untaxed. The Cambodia-China Free Trade Agreement (CCFTA) and Regional Comprehensive Cambodia’s agricultural commodity exports to Economic Partnership (RCEP) went into the Chinese market are expected to increase effect on January 1, 2022. The CCFTA and RCEP further. Thanks to the CCFTA, the Chinese tariffs aim to increase the trade in goods (and services) by on Cambodia’s exports of cashew nut, banana, reducing and eliminating tariffs and non-tariff mango, longan, and cassava starch decreased from barriers. A study by the World Bank Group 10 found 20 percent to zero percent (table 1). The Chinese that all participating countries benefit from the tariff on pepper is reduced from 20 percent to zero RCEP, although gains are not distributed equally. Table 1. China’s tariff reduction schedule under the Table 2. Cambodia’s main agricultural commodity CCFTA exports to China (percent) (metric ton) HS code Agricultural Before Year 1 2019 2020 2021 products 080131 Cashew nut 12 0 Rice 214,381 254,450 312,945 080300 Banana 10 0 (% share of rice 38.6 39.1 49.2 080450 Mango 15 0 exports) Cassava 43,744 33,817 103,611 081003 Longan 12 0 110814 Cassava starch 20 0 (% share of 52.1 45.1 67.2 cassava exports) 121221 Sugarcane 20 0 Banana 19,150 257,028 354,856 090411 Pepper 20 18 (% share of 17.1 92.8 99.7 120110 Soybean 0 0 banana exports) Source: Chinese authorities. Source: Cambodian authorities. 10 World Bank Group 2022. Estimating the Economic and Distributional Impacts of the Regional Comprehensive Economic Partnership. See https://openknowledge.worldbank.org/handle/10986/37012. 12 CAMBODIA ECONOMIC UPDATE JUNE 2022 percent after 10 years. With the zero tariff, exports improve, and reached 95,000 during the first two of these agricultural commodities to the Chinese months of market will increase. The Chinese tariffs on rice, 2022, or a 131 percent y/y increase. During the corn, refined sugar, unmanufactured tobacco, and pre-pandemic period, tourism (including natural rubber under the CCFTA, however, remain hospitality) was the second-largest growth driver, at 65 percent, 20 percent, 50 percent, 10 percent, estimated to have contributed about 18.7 percent and 20 percent, respectively. Even before the of real GDP growth in 2019. The tourism sector is CCFTA took effect, exports of Cambodia’s an important foreign exchange earner, accounting agricultural commodities – rice, cassava, and for more than three-quarters of Cambodia’s banana – increased quickly (table 2). services exports, and about one-fifth of its total goods and services exports. Tourism activity has gradually recovered Domestic consumption recovered The travel and tourism industry has gradually Thanks to the reopening of the economy, recovered, underpinned initially by domestic travel domestic consumption, which accounts for and tourism after the relaxation of travel about three quarters of GDP, has recovered. restrictions started in October 2021. With the During the first three months of 2022, imports of reinstatement of the Visa on Arrival program, goods (excluding gold) grew at 21.6 percent y/y. removal in March 2022 of the requirement for a Imports of both consumer goods and durable negative PCR test obtained 72 hours before arrival goods strengthened, reflecting improved consumer in Cambodia, and elimination of (outdoor) confidence, supporting a broad-based economic mandatory mask wearing in April 2022, the tourism recovery to take shape. Imports of consumer goods sector is now wide open for international visitors. such as foodstuffs and garments rose to 17.8 Cambodia has prepared for the return of percent and 34.6 percent, respectively (figure 11). international arrivals, with the introduction of the Imports of petroleum products, namely gasoline Siem Reap tourism development masterplan for and diesel products, grew at 64.9 percent and 56.3 2021–35 in October 2021 and completion in March percent, respectively. Imports of durables goods 2022 of a US$150 million public investment project such as passenger cars and tractors accelerated to develop the physical infrastructure, consisting of further, growing at 14.2 percent and 36.5 percent, 38 roads with a total length of 108 kilometers (80 respectively. miles) in Siem Reap. According to the Ministry of Tourism, more than 5 million domestic tourists Inflation reached 7.2 percent, hitting visited various tourist attraction sites across the a 13-year high country during the Khmer New Year in mid-April 2022. International arrivals have also started to Figure 11. Goods imports accelerated as domestic Figure 12. Inflation accelerated consumption recovered (Contributions to 12-month inflation) (y/y percent change) (percent) Others Total goods imports Foodstuff 8 Transport sub-index 80 Garment Gasoline Housing & utilities sub-index Food sub-index Diesel 6 60 Headline inflation (y/y) 40 4 20 2 0 0 -20 -2 -40 -60 -4 May-12 May-14 May-16 May-18 May-20 Sep-11 Sep-13 Sep-15 Sep-17 Sep-19 Sep-21 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 Jan-21 May-20 May-21 Sep-20 Nov-20 Sep-21 Nov-21 Mar-20 Mar-21 Mar-22 Jul-20 Jul-21 Jan-20 Jan-21 Jan-22 Source: Cambodian authorities. Source: Cambodian authorities. 13 CAMBODIA ECONOMIC UPDATE JUNE 2022 Box 2. Potential benefits of the Regional Comprehensive Economic Partnership for Cambodia A recent World Bank Group policy research working paper entitled “Estimating the Economic and Distributional Impacts of the RCEP,” shed some light on how Cambodia and other RCEP members can potentially gain from free trade agreements. It found that reductions of tariffs and non-tariff measures, implementation of rules of origin, and trade costs together with productivity gains stemming from trade cost reductions can strengthen regional trade and value chains among RCEP members. At the aggregate bloc level, the study indicates that with more liberal rules of origin, the gains in real income could double compared to tariff liberalization alone. When productivity gains are considered, the real income of the whole trade bloc could be boosted by 2.5 percent compared to the baseline, lifting 27 million additional people to middle-class status by 2035. The study provides empirical evidence on the impact of the RCEP for Cambodia’s economy, in terms of real income gains and trade. Considering the full scenario, called “RCEP_pro,” with reductions in tariffs, non- tariff measures, trade costs, and productivity increases, Cambodia is among the countries that benefit the most, with real income increases around 3.5 percent, which are the third-largest income gains after Vietnam (4.9 percent) and Malaysia (4.6 percent) (figure B.2.1). However, the fall in tariffs alone will exert a negative impact on real income in Cambodia (2.6 percent). This is associated to a fall in tariff revenue and negative terms of trade, with prices of exports dropping faster than import prices. However, Cambodia’s real income will significantly increase from a fall in non- tariff measures such as rules of origin liberalization). Due to the RCEP impact on trade, significant gains are expected (figure B.2.2). The study also found that exports increase for all RCEP member countries under all RCEP scenarios. The increase in trade is higher when the full scenario “RCEP_pro” with productivity kick is assumed. Under this scenario, Cambodia is among the countries with a higher increase in exports, with a surge of exports around 6.5 percent, after Vietnam (11.4 percent), Japan (8.9 percent), and the Philippines (8.5 percent). For Cambodia, in terms of exports, wood, and paper products (34.8 percent), chemicals, rubber, plastics (25.3 percent), and electrical equipment and machinery (24.2 percent) expand the most, as a result of tariff reductions in the case of chemicals and plastics (a 2 percentage point reduction, between 2035 and 2020), and due to non-tariff measure reductions for wood and paper (a 14.8 percentage points decrease between 2035 and 2020). Figure B.2.1: Real income gains by Figure B.2.2: Impact on trade: country: Percentage change relative to Percentage change relative to business- 6 business-as-usual scenario, 20351/ as-usual scenario, 2035 5 RCEP_tar RCEP 4 Intra RCEP trade RCEP_roo RCEP_prod 3 2 Exports to ROW RCEPtar 1 Imports from RCEP 0 ROW RCEP_roo -1 RCEPprod Intra ROW trade -5.0 0.0 5.0 10.0 15.0 20.0 Source: Estrades Pineyrua et al. 2022. Note: 1. The scenarios include (i) RCEP_tar/RCEPtar, with policy instrument of the RCEP tariff reduction schedule; (ii) RCEP, with policy instrument of tariff and non-tariff measures (NTM): RCEP tariff reduction schedule and preferential NTM reduction: -35% agricultural goods, - 25% manufacturing goods, -25% on services, 10% non-preferential NTM reduction; (iii) RCEP_roo, with policy instrument of tariffs, NTM, and trade costs: RCEP tariff reduction schedule NTM reduction as in RCEP and 1% reduction in trade costs among RCEP members; and (iv) RCEP_prod/RCEPprod, with policy instrument of tariffs, NTMs, and trade costs: RCEP_roo with productivity increase. Inflationary pressures have risen, led by rising and petroleum products (figure 12). The food and oil prices triggered by the Russia– contribution of the food subindex, which accounts Ukraine conflict. Headline inflation accelerated to for 43.2 percent of Cambodia’s Consumer Price 7.2 percent y/y in March 2022, hitting a 13-year Index (CPI) basket, doubled, reaching 3.1 high, caused largely by rapidly rising prices of food percentage points in March 2022, up from 1.6 14 CAMBODIA ECONOMIC UPDATE JUNE 2022 percentage points during the same period last year, members, Cambodia has a relatively low (paved) driven largely by rising prices of rice, beef, fish, road density – that is, the ratio of the length of the fruits, and vegetables. The contribution of the country’s total road network to its land area. In transport subindex also climbed to 1.3 percentage addition, Cambodia imports 100 percent of its points, up from zero percentage points during the petroleum products. The fuel products it imports same period last year as petroleum prices surged. also account for a relatively large proportion of The contribution of the housing (and utilities) GDP (6.2 percent), suggesting that price rises may subindex also increased, to 1.2 percentage points, have a comparatively larger impact on economic up from 0.2 percentage points, as costs of housing activity, weighing on household budgets. The maintenance and repair materials soared. income effects hit consumer demand, and higher input costs constrain production. Rising oil prices have a cascading effect on the costs of essential goods and services. As Globally, price pressures also quickly rose, reflected in Cambodia’s CPI basket, the weighted spilling over to Cambodia’s dollarized average inflation of utilities, transport, education, economy. The rapid stimulus-led rebound in the and recreation fees surged, reaching 10.5 percent United States has contributed to higher inflation. y/y in March 2022, up from 1.2 percent during the The United States recorded a 41-year-high inflation same period last year (figure 13). Similarly, the rate of 8.5 percent in March 2022. Given that weighted average inflation of household Cambodia’s economy is highly dollarized, and the furnishings, construction materials, medical riel has been pegged to the dollar, rising inflation in supplies, and personal appliances goods accelerated the United States leads to rising domestic price to 5.6 percent, up from 0.6 percent. The weighted pressures, which often results in “imported” average inflation of housing maintenance, clothing inflation. repair/cleaning, medical care, and personal care wages also rose, reaching 2.9 percent y/y, up from 1.8 percent. Rising oil prices are contributing to the The trade balance initially improved increase in the cost of living, limiting the During the first quarter of 2022, the trade purchasing power of consumers. deficit is estimated to have narrowed, while FDI inflows have somewhat improved. Cambodia’s The negative impact of the oil price shock on goods export growth accelerated, surpassing its inflation is exacerbated by high transport costs. pre-pandemic growth rate. In the first quarter of The relatively high transport costs, as reflected in 2022, merchandise exports surged, while the weight of the transport and communication merchandise imports eased, leading to temporary component in Cambodia’s CPI consumption improvements in trade and the current account basket of 12 percent, which is higher than the 9.4 balance. Total goods exports grew by 28.7 percent percent in Vietnam (figure 14), can be attributed to a number of factors (see Special Focus Section on Post-pandemic supply chain disruptions: strategies to reduce logistics costs). Among all ASEAN Figure 13. Inflation of selected goods, labor, and fees Figure 14. Weights of transport and accelerated communication component in CPI baskets and (y/y percent change) road densities1 Selected Labors Selected Goods Selected Fees Weight of transport and communication (%) 25 6 12 Road density (km of road/square km of land area, RHS) 10 5 20 8 6 4 15 4 3 2 10 0 2 -2 5 1 -4 -6 0 0 Vietnam Philippine Thailand Malaysia Singpore Indonesia Cambodia -8 May-12 May-14 May-16 May-18 May-20 Sep-11 Sep-13 Sep-15 Sep-17 Sep-19 Sep-21 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 Jan-21 s 15 Sources: Cambodian authorities. Source: Haver analytics and ASEAN Stat Data Portal. Note: 1/ 2022 or latest available years; RHS = right-hand scale. CAMBODIA ECONOMIC UPDATE JUNE 2022 Box 3. Potential benefits of the Cambodia-China Free Trade Agreement1 There are substantial potential economic benefits to be gained from the Cambodia–China Free Trade Agreement (CCFTA), which went into effect on January 1, 2022. This FTA has been widely viewed as a catalyst for economic growth in the post-COVID-19 pandemic era. Based on Trade Atlas 2022,2 Cambodia’s exports to China have been expanding rapidly, rising from US$65 million 2010 to US$1.5 billion in 2021. Under the CCFTA, over 90 percent of tariff lines of trade in goods for both sides enjoy zero tariff, and the service market commitments also represent the highest levels among the two sides’ agreements with their free trade partners.3 Policymakers are optimistic about this FTA, arguing that this deal would also increase access to China, which is a huge market for Cambodia, particularly for potential agricultural products such as rice, banana, and mango, among others.4 According to official sources, this deal is projected to raise Cambodia’s annual export growth rate to China by 25 percent.5 The CCFTA is expected to also attract more foreign investors, especially Chinese ones, to the country. As summarized in table B3.1, there is substantial potential for Cambodia’s agricultural commodities to be exported to the Chinese market under the Chinese zero tariff lines. The tariffs for all agricultural commodities, except those for rice, corn, cane, unmanufactured tobacco, and natural rubber, dropped from 12 to 20 percent to zero percent in year 1. Table B3.1. The Chinese tariff schedule, exports to the Chinese market, and domestic production HS Main products Tariff (%) Exports to China (’000 ton) Production (’000 ton) code Items Before Year 1 2019 2020 2021 2019 2020 2021 Untapped potential as production is much larger than exports 0801 Cashew nut 12 0 2 4 2 209 242 473 0803 Banana 10 0 19 257 355 613 478 616 0804 Mango 15 0 0 0 6 1,449 1,382 2,197 1108 Cassava (starch and fresh) 20 0 44 34 104 13,513 12,684 13,233 1212 Sugar 20 0 31 0.0 0.0 0904 Pepper* 20 18 0.0 0.0 0.0 21 18 18 1201 Soybean 0 0 0.0 0.0 0.0 42 30 16 1006 Rice (paddy)** 65 65 214 254 313 10,886 10,936 12,207 1005 Corn 20 20 0 0 0 985 822 614 1701 Cane sugar 50 50 0 0 0 618 681 2,422 2401 Unmanufactured tobacco 10 10 0 0 0 7 7 0 4001 Natural rubber (rubber) 20 20 18 14 12 288 349 368 4203 Garment (clothing) 24 0 13 11 11 4202 Travel goods (bags) 24 0 1 1 2 6401 Footwear (shoes) 24 0 3 4 4 8711 Bicycle 45 0 2 6 9 8712 Motorcycle 13 0 0 0 0 Sources: Ministry of Commerce, People’s Republic of China (http://fta.mofcom.gov.cn/topic/encambodia.shtml); and the Ministry of Agriculture, Forestry and Fisheries, Royal Government of Cambodia. Annual Reports for 2019‒2020, 2020‒2021, and 2021‒2022. Note: *Tariff rate will be reduced to zero at year 10. **Tariff reduction for rice and exports, but paddy figures for production. To this end, a long list of agricultural commodities, which include cassava, mango, banana, cashew nut, and soybean, could benefit from the Chinese zero tariff lines, as their production is much larger that their exports to the Chinese market. Exports of three key agricultural commodities, namely mango, banana, and cassava, were reported to have increased significantly. Impact of tariff reduction on major non-agricultural products such as garment, travel goods, footwear, bicycles, and motorcycles is unlikely to be substantial due to product specific rules which require that these non-agricultural products undergo sufficient transformation. (figure 15), driven largely by exports of main In contrast, imports growth decelerated. Due to the manufacturing products, namely garment, travel decline of gold imports, total merchandise imports goods, and footwear, which grew at 20.7 percent. in the first quarter of 2022 contracted by 0.9 16 CAMBODIA ECONOMIC UPDATE JUNE 2022 Box 3. Potential benefits of the Cambodia-China Free Trade Agreement (cont’d) However, due to complicated non-tariff measures, exporting agricultural commodities to China is not easy.6 Nonetheless, the export of fresh Cambodian agricultural products such as mango and banana was made possible by a protocol for Mango Phytosanitary Requirements, which was signed in June 2020 between Cambodia’s Ministry of Agriculture, Forestry and Fisheries (MAFF) and China’s General Administration of Customs (GACC) of China. The protocol regulates how fresh mango fruits to be exported to China from Cambodia should comply with relevant Chinese laws and regulations in order to meet the phytosanitary requirements. The protocol allows Chinese regulators to certify that specific Cambodian packing factories and farms meet all quality standards. This was previously not the case, and Cambodian exporters had to ship their produce to Vietnam before entering China. The surge in exports of agricultural commodities can also be attributed to the step-by-step export procedure manuals7 jointly produced by the MAFF and Germany’s main development agency (Deutsche Gesellschaft für Internationale Zusammenarbeit, GIZ). Those manuals provide detailed guidelines for Cambodian private enterprises that wish to export their products to China, and can be summarized as follow for the case of mangos. First, businesses wishing to export mangos need to register with the MAFF’s General Directorate of Agriculture, which is responsible for sending the list of registered farms and packinghouses to the GACC. The GACC will then send inspectors to Cambodia to verify and evaluate selected registered companies on the management of growing, packaging, storage, and transportation of mangoes. Only companies approved by the MAFF and GACC can export mangoes to China. Second, exporters need to obtain certificates and maintain standards including inspection and quarantine by the MAFF. These include sanitary and phytosanitary certificates, good orchard management, and compliance review. The MAFF is required to conduct a physical inspection that covers at least a 2 percent sample of the total mango quantity packed for export. All export-registered orchards need to establish and implement GAP certification. Before exporting, the GACC sends plant quarantine experts to Cambodia to carry out system compliance review; check and evaluate the management of planting, processing, storage, and transportation of mango; and the effectiveness of the export inspection and quarantine system in Cambodia. Third, exporters need to obtain customs declarations and supporting documents. Exporters must comply with customs procedures and obtain export licenses and certificates of origin. Specifically, exporters must register with the Automated System for Customs Data (ASYCUDA) at the General Department of Customs and Excise before the customs authorities automatically recognize exports, while obtaining certificates of origin from the Ministry of Commerce to certify goods were produced in Cambodia. All packing plants and storehouses must establish a traceability system to ensure that the export fruits can be traced back to the registered orchard. All mango products must be labelled. Note: 1. This box was prepared by Runsinarith Phim and Sodeth Ly. 2. https://www.tradeatlas.com/en. 3. http://fta.mofcom.gov.cn/enarticle/chinacambodiaen/chinacambodiaennews/202112/46486_1.html. 4. http://www.lmcchina.org/eng/2022-03/04/content_41903127.html. 5. https://www.khmertimeskh.com/501062382/rcep-cambodia-china-fta-catalysts-for-economic-growth-in-post-pandemic. 6. UNCTAD 2020. 7. Ministry of Agriculture, Forestry and Fisheries and GIZ (2020): Guidelines for Exporting Mangoes from Cambodia to China. percent y/y. Imports of gold, which is used as a by the collapse of tourism receipts. As a result, the savings asset and which surged in 2021, exchange rate was under increased pressure, significantly eased, declining by 47.6 percent. requiring the central bank to intervene in the foreign exchange market by injecting US$591.2 In 2021, Cambodia’s current account deficit million, while scaling down its local-currency- deteriorated quickly as the trade deficit denominated Liquidity-Providing Collateralized widened. A surge in imports, driven mainly by rising gold imports, which shot up to US$5.9 billion, a sevenfold increase, as gold traders increasingly hedged against volatility, significantly worsened the trade balance. In addition, the balance of payments was also negatively impacted 17 CAMBODIA ECONOMIC UPDATE JUNE 2022 Operation (LPCO) (see more discussion on the affected by rising prices of fertilizer (and pesticide), LPCO in the monetary section below). 11 because the increase in fuel prices feeds through to increased prices of fertilizer, which is an energy- The oil price shock is worsening the intensive commodity. Cambodia’s imports of fertilizer as a percentage of GDP are among the terms of trade largest in the EAP region. Despite an initial improvement in the external balance, the negative terms of trade shock has The exchange rate remained stable started to weigh on the current account deficit. In the East Asia and Pacific (EAP) region, In the first quarter of 2022, exchange rate Cambodia is among a few countries that are heavily stability returned as external imbalances dependent on fuel imports (figure 16). While initially improved. Foreign exchange intervention improving, this year’s current account deficit is by the central bank ceased in September 2021, expected to remain large. To finance this year’s while nominal values of the Cambodian riel vis-à- continued large current account deficit, strong vis the U.S. dollar remained broadly within the capital inflows must continue. The new Law on targeted ±2 percent range. The exchange rate of the Investment, the CCFTA, and the RCEP are riel was broadly stable, reaching 4,045 riels per U.S. attracting foreign investment and regional trade. dollar in April 2022, compared to 4,047 riel per U.S. However, the zero-COVID policy in China dollar during the same period last year. In the first continues to constrain capital inflows from quickly quarter of 2022, the exchange rates of the riel accelerating. Moreover, the U.S. Federal Reserve versus a number of Cambodia’s main trading decided in March 2022 to raise the target range for partners in the region remained broadly stable. The the federal funds rate by half a percentage point to riel/Thai baht exchange rate marginally 3/4 to 1 percent, which may trigger tighter external appreciated, reaching 122 riel per baht, down from liquidity conditions including for Cambodia. 12 130 riel per baht. The riel/Chinese yuan exchange rate, however, depreciated to 639 riel per yuan, up from 625 riel per yuan. The riel/Vietnamese dong While being a rice exporter, the country has not exchange rate remained broadly unchanged at 0.17 been able to take advantage of agricultural riel per dong. commodity price increases. As discussed in the agricultural commodity exports section above, with further increases in ocean freight, triggered by the Monetary conditions continued to be oil price shock, Cambodia is struggling to increase accommodative exports of rice. Moreover, the country is being Figure 15. The trade balance initially improved Figure 16. Cambodia is among the largest exporters (percent of GDP) of rice and importers of fertilizers (percent of GDP) Goods exports Goods imports 20 Trade deficits Exports (y/y, RHS) 15 20 Imports (y/y, RHS) 80 15 70 10 10 5 60 5 0 50 0 -5 40 -5 -10 30 -10 -15 20 China Vietnam Lao PDR Thailand Mongolia Myanmar Cambodia Malaysia Indonesia Timor-Leste Philippines Papua New Guinea -20 10 -25 -30 0 -35 -10 Crude oils Refined oils Petroleum gases 2019Q1 2020Q1 2021Q1 2022Q1 East Asia Source: Cambodian authorities. Source: World Bank 2022a. Note: Q = quarter; RHS = right-hand scale. 11 National Bank of Cambodia 2022; 12 See https://www.nbc.org.kh/download_files/publication/annual_rep_k https://www.federalreserve.gov/newsevents/pressreleases/monetary h/Annual%20Report%202021%20Publish.pdf. 20220504a.htm. 18 CAMBODIA ECONOMIC UPDATE JUNE 2022 Monetary policy easing continued to provide US$0.28 billion (5.1 percent), and US$0.21 billion liquidity, underpinning economic recovery. In (3.8 percent), respectively. The other sectors addition to its growing operations under the LPCO accounted for the remaining US$3.2 million. 15 arrangements, which have helped bring down the interest rates of local currency-denominated loans Broad money growth partly and establish a benchmark rate, the National Bank of Cambodia, Cambodia’s central bank, introduced recovered in September 2021, a Marginal Lending Facility During the first three months of 2022, broad (MLF), offering riel-denominated overnight loans money (M2) growth eased, thanks mainly to that can be extended up to five days, using the deceleration of foreign currency deposits negotiable certificates of deposit as collateral. 13 The (FCDs). M2 growth reached 13.8 percent y/y in MLF was established to provide short-term March 2022 (figure 17), down from 20.3 percent liquidity demanded by the banking sector and to during the same period last year. M2 growth foster the development of the interbank market. decelerated sharply to 9.7 percent y/y in April 2020, The MLF aims to encourage the use of local when the country was hit hard by local outbreaks, currency in Cambodia’s highly dollarized economy, which triggered lockdowns in many urban centers of which the banking system’s foreign currency such as the capital city of Phnom Penh and (mostly U.S. dollar) deposits account for about 82 Takhmao. During the pre-pandemic period, the percent of broad money. five-year historical average of the M2 growth rate was 21.5 percent. Of the 13.8 percent broad money The central bank also maintained a reserve growth, the contribution of foreign currency requirement ratio of 7 percent for both riel and deposits (and other deposits) accounted for 11.5 U.S. dollar deposits and borrowings, and allowed percentage points. The contribution of transferable the banking and microfinance sectors to continue deposits accounted for 2.3 percentage points. to restructure loans until the end of 2021. 14 By end- Injection of local currency into circulation 2021, 370,785 borrower accounts (11.1 percent of continues to be constrained by the highly dollarized total borrower accounts) amounting to US$5.5 economy. Therefore, the contribution of (local) billion (12.1 percent of total outstanding credits currency in circulation to broad money growth provided to the private sector) were restructured. eased further, decelerating 0.1 percentage points in Of the total US$5.5 billion restructured loans, the March 2022, down from 1.8 percentage points tourism, construction, transport and logistics, and during the same period last year. garment sectors accounted for US$0.98 billion (17.8 percent), US$0.81 billion (14.7 percent), and Figure 17. Broad money partly recovered – Figure 18. Foreign direct investment inflows Contribution to broad money growth continued to hold up (percentage point) (y/y percent change) Transferable deposits 70 Currency in circulation 34 60 Foreign currency deposits (other deposits) Foreign Direct Investment 29 M2 y/y, percent change Foreign Currency Deposits 50 24 40 19 30 14 20 9 10 4 0 -1 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Apr-19 Apr-20 Apr-21 Jul-19 Oct-19 Jul-20 Oct-20 Jul-21 Oct-21 Jan-19 Jan-20 Jan-21 Jan-22 Source: Cambodian authorities. Source: Cambodian authorities. 13 See 15 National Bank of Cambodia 2022. See https://www.nbc.org.kh/download_files/news_and_events/ https://www.nbc.org.kh/download_files/publication/annual_rep_k announ_kh/IntroducingMLF.pdf. h/Annual%20Report%202021%20Publish.pdf. 14 See May 21, 2021, announcement on policy easing measures (third round) by the National Bank of Cambodia. 19 CAMBODIA ECONOMIC UPDATE JUNE 2022 Foreign currency deposit (FCD) growth eased, percent in March 2022, up from 142.2 percent expanding at 13.8 percent y/y in March 2022, during the same period last year. down from 19.8 percent during the same period last year. For many years, FCDs have been used as a Deposit growth remained healthy. Deposits proxy of capital inflows, mainly in the form of FDI grew at 15.3 percent y/y in March 2022, compared inflows (figure 18). Rising FCDs often reflect to 20.6 percent during the same period last year. improved confidence in the banking system and The loan-to-deposit ratio therefore increased to increased FDI inflows to the economy and vice 129.7 percent, up from 122.3 percent. Deposit versa. In addition, FCDs (mostly U.S. dollar growth hit its lowest growth rate of 7.3 percent in deposits) have been attracted by Cambodia’s April 2020, as the pandemic hit the economy relatively high interest rates of U.S. dollar- hardest. During the time of COVID-19, the deposit denominated lending and deposits. Cambodia’s growth rate has been consistently below that of highly dollarized economy eliminates the exchange credit growth, and a widening gap between credit rate risk. Continued strong demand for credit and deposit growth may indicate rising imbalances caused in part by Cambodia’s relatively low saving between the demand for domestic credit and the rate has kept domestic interest rates high. While supply of credit (domestic savings). As the demand remaining high, domestic interest rates have been for credit increased, some banks continued to lend, declining in the past several years as capital inflows regardless of the domestic deposits they received, continue. because they obtained funding from their parent banks abroad. Domestic credit growth recovered, The contribution of construction, underpining economic recovery real estate to credit growth eased Likely reflecting an improved demand for credit as economic activity improved, domestic While the demand for domestic credit credit growth recovered. Domestic credit grew at remained relatively strong, domestic credit 22.4 percent y/y in March 2022 (figure 19), up from financing the construction and real estate 21.1 percent during the same period last year. While sector eased. Of the 24.6 percent bank credit the growth rate of 22.4 percent remained below the growth as of December 2021, the contribution of five-year average credit growth rate of 31 percent construction, real estate, and mortgages was 8.8 recorded before the pandemic period, it followed a percentage points, down from 9.4 percentage more sustainable path as construction and real points during the same period last year (figure 20). estate activity remained sluggish (see below for In contrast, during the same period, the more discussion on credit to the construction and contributions of lending to wholesale and retail, real estate sector). During the same period, the agriculture, hotels and restaurants, and credit-to-GDP ratio also increased further, to 174 manufacturing to credit growth rose to 6.8 Figure 19. Credit growth recovered, while deposit Figure 20. The contribution of construction and growth remained eased real estate to credit growth eased (y/y percent change) (percentage point) 60 CRM Agriculture Credit to the private sector Manufacturing Hotels and restaurants 35 Private sector deposit Wholesale & retail Other 50 30 40 25 30 20 15 20 10 10 5 0 0 Apr-14 May-16 Apr-19 May-21 Nov-13 Sep-14 Aug-17 Nov-18 Sep-19 Jun-13 Dec-15 Mar-17 Jun-18 Dec-20 Mar-22 Feb-15 Jul-15 Oct-16 Feb-20 Jul-20 Oct-21 Jan-13 Jan-18 Apr-17 Apr-18 Apr-19 Apr-20 Apr-21 Aug-17 Aug-18 Aug-19 Aug-20 Aug-21 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Feb-17 Oct-17 Feb-18 Oct-18 Feb-19 Oct-19 Feb-20 Oct-20 Feb-21 Oct-21 Source: Cambodian authorities. Source: Cambodian authorities. Note: CRM = construction, real estimate, and mortgage. 20 CAMBODIA ECONOMIC UPDATE JUNE 2022 percentage points, 2.4 percentage points, 1.7 maintained 2.8 million depositor accounts, or a 3.7 percentage points, and 0.9 percentage points, percent increase. respectively, up from 4.5 percentage points, 1.9 percentage points, 0.5 percentage points, and 0.6 The cash transfer program percentage points, respectively, reflecting an across-the-board expansion of credit financing of continued to support households all business activities (except construction, real amid rsing inflation estate, and mortgage lending activity). The increases in oil and food prices weighed In 2021, the reported overall nonperforming on household budgets and consumption, but loan ratios remained low at 2.5 percent for the the cash transfer program helped mitigate banking and microfinance sectors. 16 However, some of the impacts. The cash transfer program, given the loan restructuring process offered by the largest component of the government’s support banks and microfinance institutions, the reported package, continued to help mitigate negative nonperforming loan ratios may not correctly reflect impacts on poor and vulnerable households. the level of debt distress facing the banking and Launched in June 2020, the program has disbursed microfinance system. US$653 million in cash transfers as of April 2022. The program has reached about 690,000 Financial deepening continued to accelerate, households (2.7 million individuals) or about 17 and both the banking and microfinance sectors percent of the population – a dramatic increase expanded. According to the central bank, by the compared to the pre-COVID-19 level of social end of 2021, total assets of the banking sector rose assistance. The COVID-19 relief cash transfers by 15.9 percent to US$58 billion, while those of the prevented almost 300,000 people from falling into microfinance sector rose by 17 percent to US$9.8 poverty in 2020. The cash transfers were used to billion. During the same period, domestic credit buy food when local markets had sufficient food, provided by the banking sector rose by 20.3 percent but the poor could not afford to purchase it. Even to US$36.8 billion, while credit of the microfinance with the cash transfers, per capita consumption of sector rose by 25.6 percent to US$8.5 billion. The the lowest quintile declined by 25 percent, and the banking sector served 1.2 million borrower program had no effect on households outside the accounts or an increase of 34.5 percent, while the bottom 20 percent in 2020, which were largely microfinance sector lent to 2 million borrower ineligible for the program. In addition, the energy accounts or an increase of 5.2 percent. The banking and food price hikes due to the Russia-Ukraine sector had 9.2 million depositor accounts or a 33.3 conflict has imposed an additional burden and are percent increase. The microfinance sector expected to slow the pace of poverty reduction further as they weigh on household budgets. Given Figure 21. Central government revenue marginally Figure 22. Central government expenditure also improved (billion of riels) accelerated (billion of riels) Non-tax revenues Capital expenditure Tax revenue Goods & services Wages & compensation Revenue (y/y, percent change, RHS) 8,000 30 Expenditure (y/y percent change, RHS) 6,000 20 7,000 25 5,000 15 6,000 20 4,000 10 5,000 3,000 5 4,000 15 3,000 2,000 0 10 2,000 1,000 -5 5 1,000 0 -10 2019Q1 2020Q1 2021Q2 2022Q2 0 0 2019Q1 2020Q1 2021Q2 2022Q2 Source: Cambodian authorities. Source: Cambodian authorities. Note: CRM = construction, real estiamte and mortgage. 16 National Bank of Cambodia 2022. 21 CAMBODIA ECONOMIC UPDATE JUNE 2022 that the public and private sector wages have been services, which grew at 43.4 percent, amounting to effectively capped, real wages and earnings decline US$0.43 billion, while wages and compensation as inflation rises. The official poverty rate measured were contained as public sector salaries have been at the national poverty line declined by 1.6 frozen since 2021 to save budgetary funds to percentage points per year during 2009‒2019/20, mitigate impacts of the pandemic. Capital expenditure also grew, reaching 3,249 billion riels driven substantially by rising labor (especially (US$0.79 billion), thanks to rising loan wage) earnings. disbursements (foreign-financed capital spending), which surged by 72.1 percent, amounting to 2.255 Revenue collection increased billion riel (US$0.54 billion) (see more discussion marginally on loan disbursements in the public debt section below). As a result, in the first quarter of 2022, the Thanks to improved domestic economic central government budget deficit (excluding activity, domestic revenue marginally picked grants) of 2,069 billion riel (US$0.5 billion) was up. During the first quarter of 2022, central overfinanced by foreign financing, which included government revenue collection rose by 6.2 percent both loan and grant disbursements of 2,664 billion y/y, reaching 5,442 billion riels (US$1.3 billion), riel (US$0.64 billion). driven largely by improved tax revenue (figure 21). Tax revenue increased by 10.5 percent, amounting to 4,980 billion riels (US$1.2 billion), thanks mainly The fiscal deficit is expected to to better direct revenue (direct tax) collection. remain relatively large at 6.6 percent Direct revenue improved as impacts of the of GDP pandemic on business profit and income eased. In addition, nontax revenue, heavily dependent on The annual budget for 2022 is characterized by tourism receipts, continued to be hard hit by the continued countercyclical fiscal support, aiming at implementing Cambodia’s economic pandemic, contracting by 24.1 percent, declining to 452 billion riels (US$110 million). recovery plan, which was introduced late last year. As both revenue and expenditure are expected to Budget expenditures also accelerated, thanks increase by about half a percentage point, the fiscal to the rising disbursement of goods and deficit is projected to remain elevated but services and capital expenditures (figure 22). unchanged at 6.6 percent of GDP in 2022 (figure During the first quarter of 2022, central 23). Revenue, including grants, is marginally government expenditure rose by 20.1 percent, improving, and is projected to reach 21.4 percent amounting to 7.511 billion riels (US$1.83 billion), of GDP, driven largely by better tax revenue as both current and capital expenditures performance as economic activity is picking up, accelerated. Rising current expenditure was driven while non-tax revenue, which depends mainly on largely by a surge in spending on goods and tourism receipts, continues to be subdued. Figure 23. The general government deficit widened Figure 24. Loan disbursements by creditors (percent of GDP) (US$ million) Republic of IFAD, Thailand, AIIB, 35 Korea, EIB, Total revenue (and grants) Total expenditure Overall balance 11.2 , 5.5 , 1% 5.0 , 72.1 , 6% 22.5 , 2% 30 1% 0% WB, 84.5 , 25 7% Japan, 20 France, 382.0 , 33% 101.… 15 ADB, 189.0 , 16% 10 China, 285.5 , 25% 5 0 -5 -10 2018 2019 2020 2021e 2022p Source: Cambodian authorities. Source: Cambodian authorities. Note: e = estimates; p = projection. 22 CAMBODIA ECONOMIC UPDATE JUNE 2022 Expenditure is expected to reach 28.0 percent of and being rescheduled, accounted for 6.64 percent GDP, driven by expansion of public investment of the total. and continued fiscal intervention to mitigate the impacts of the pandemic. U.S. dollar-denominated debt remained the largest, accounting for 43.5 percent of total Fiscal support measures are budgeted to reach debt stock, followed by Special Drawing Right 2.8 percent of GDP in 2022, down from an (SDR)-denominated debt, at 22.9 percent. estimated 4.9 percent of GDP disbursed in Although China is Cambodia’s top creditor, the 2021. As discussed above, the cash transfer country’s public external debt denominated in program continues to be the largest component of Chinese yuan covered only 14.5 percent of total the government’s fiscal support package, debt stock. Proceeds from external borrowing are accounting for about 0.6 percent of GDP. largely invested in public infrastructure. Of total Domestically financed capital spending continues debt stock, 82 percent financed public investment to account for the majority (55 percent) of in the infrastructure sector and 18 percent in other development expenditure, which is projected to priority sectors. In 2021, Cambodia made total debt reach 10.5 percent of GDP in 2022, up from 9 service payments of US$382.78 million to its percent in 2021. External borrowing is expected to official creditors, of which payments of principal finance about two-thirds of the deficit, while the and interest (and fees) were US$285.66 million and rest is to be financed by a drawdown of US$97.12 million, respectively. government deposits (fiscal reserves), which stood at 17.4 percent of GDP in December 2021, down Disbursements of loan proceeds by from 23.7 percent at the end of 2020. Due to the Cambodia’s creditors rose during the oil price shock, achieving the objectives and targets pandemic period. Total loan disbursements under the 2022 budget are increasingly challenging increased from US$829.74 million in 2019 to as costs of goods and services increase. Public US$1.213 million in 2020 to US$1,158 million in investment project cost overruns are likely, as 2021. In 2021, three main creditors, Japan, China, inflation surged, resulting in rising costs of inputs and the Asian Development Bank, disbursed such as building materials, labor, and machinery. US$382 million (33 percent of total), US$285.5 million (25 percent of total), and US$189 million Cambodia’s public debt-to-GDP (16 percent of total), respectively (figure 24). The ratio reached 35.0 percent of GDP by combined disbursement amount by the three creditors accounted for three-quarters of total loan end-2021 disbursements in 2021. Cambodia’s public debt-to-GDP ratio reached US$9.4 billion in outstanding debt by end- While the country’s public debt currently 2021. 17 To finance Cambodia’s widening financing consists solely of external debt, the domestic gap, the country’s public debt, which consists solely debt market is being established. In this regard, of external debt, rose quickly during the time of an initial policy framework for issuance of the first COVID-19 to 35 percent of GDP in 2021, up from government securities, newly established domestic 28.2 percent of GDP in 2019. Public debt owed to debt instruments, was approved in October 2021. bilateral and multilateral creditors accounted for 69 In March 2022, a Prakas on the Issuance of percent and 31 percent, respectively. Cambodia’s Government Securities was signed. The Prakas largest official creditor is China. Total debt owed to regulates issuing and trading of riel-denominated China reached US$4.05 billion, or 44.3 percent of government securities in a transparent, total debt stock by end-2021. Cambodia’s second- accountable, efficient, and effective manner, while largest creditor is the Asian Development Bank. ensuring the sustainability of public debt Total debt owed to the multilateral creditor reached management. Investors targeted under the initial US$1.94 billion, or 20.5 percent of the total. policy framework include commercial banks, Cambodia’s third-, fourth-, and fifth-largest microfinance deposit-taking institutions, and other creditors are Japan, the World Bank, and the investors. The introduction of government Republic of Korea, accounting for 9.1 percent, 7.7 securities will help gradually diversify financing percent, and 5.2 percent of total outstanding debt, sources with a shift toward public domestic debt, respectively. Old debt, which is under negotiation 17Cambodia Public Debt Statistical Bulletin, Volume 13, February 2022, Ministry of Economy and Finance. 23 CAMBODIA ECONOMIC UPDATE JUNE 2022 while promoting domestic savings. It also helps de- with a medium classification. The baseline dollarize the economy. macroeconomic scenario reflects fallout from the COVID-19 shock on growth, exports (notably, the Despite rising public debt, risk of tourism sector), and revenues. The total PPG debt- to-GDP ratio is projected to rise by around 5 debt distress remains low percentage points during the next decade. Overall, The Joint Bank/International Monetary Fund the analysis shows that the overall risk of debt Debt Sustainability Analysis (DSA) conducted distress is low, but debt sustainability is vulnerable in 2021 indicated that Cambodia remained at to further shocks to exports and growth. These low risk of external and overall debt distress. 18 findings reinforce the importance of implementing The current debt-carrying capacity is consistent reforms to increase the economy’s resilience to Table 3. Macro outlook 2021e 2022p 2023p 2024p National Accounts and Prices GDP at constant market prices (% change) 3.0 4.5 5.8 6.6 Agriculture 1.1 1.3 1.5 1.5 Industry 7.4 8.6 9.1 9.2 Services -1.0 1.6 4.1 5.6 Consumer Price Index 3.5 7.2 4.5 4.0 General Government (% of GDP) Revenue and grants 20.9 21.4 22.6 24.6 Expenditure and net lending 27.7 28.0 28.8 29.2 Overall balance (including grants) -6.8 -6.6 -6.2 -4.6 Foreign financing 3.6 5.6 4.7 4.0 Net domestic financing (from current savings) 4.4 2.2 2.8 1.9 Amortization -1.2 -1.2 -1.3 -1.3 Money and Credit Broad money (% change) 20.0 21.4 21.0 22.5 Credit to the private sector (% change) 23.2 25.8 28.1 28.5 External Sector (US$m unless otherwise stated) Exports (goods and services) 20,731.2 25,891.4 32,484.2 39,942.6 Imports (goods and services) 28,746.8 31,203.0 36,406.8 42,881.4 Foreign direct investment, net inflows 3,391.0 3,451.3 4,042.3 4,875.9 Gross official reserves 19,917.9 20,810.4 22,049.9 23,532.1 (Months of imports) 9.0 8.1 7.5 7.1 Current account (percent of GDP) -37.0 -24.7 -18.6 -14.9 Exchange rate (riel per US$ average) 4,100.0 4,150.0 4,110.0 4,100.0 Debt Stock and Service Total public debt (% of GDP) 35.0 35.9 35.6 35.3 Memorandum items: Nominal GDP, US$ million 26,908.6 29,789.9 32,873.7 36,015.1 Sources: Cambodian authorities and World Bank staff estimates and projections. Note: e = estimate; p = projection. 18International Monetary Fund Staff Report for the 2021 Article IV mbodia-2021-Article-IV-Consultation-Press-Release-and-Staff- Consultation-Debt sustainability Analysis; Report-510848. https://www.imf.org/en/Publications/CR/Issues/2021/12/08/Ca 24 CAMBODIA ECONOMIC UPDATE JUNE 2022 external shocks and encourage export and Cambodia maintains a policy space that it could economic diversification, and efforts to mobilize deploy should these risks materialize, its fiscal fiscal revenue and further enhance public financial buffer has shrunk after years of fiscal intervention. management. In addition, high credit growth and concentration of domestic credit in the construction and real estate sectors remain a key risk to Cambodia’s Outlook financial stability. Cambodia’s real GDP growth is projected to Cambodia is currently weathering the global reach 4.5 percent in 2022 (table 3). The relatively food and oil price shocks. Rising energy and food subdued growth projection reflects anticipated prices have fueled higher inflation. Inflationary impacts of the negative terms of trade shock caused pressures are expected to continue due to the by rising oil prices; a cyclical slowdown in the Russia-Ukraine conflict, which disrupts oil and United States, Cambodia’s largest exports market; wheat supplies. The negative impact of rising and slower growth in China. In addition, the path petroleum prices on inflation in Cambodia is of the economy continues to depend on the course relatively strong due its relatively high transport of the virus. Thanks to continued progress on costs, suggesting that price rises may have a vaccinations, further relaxation of travel comparatively large impact on economic activity, restrictions supports continued gains in economic weighing on household budgets. Income effects hit activity and employment. Domestic economic consumer demand, and higher input costs activity is expected to remain robust, contributing constrain production. to economic recovery. Over the medium term, the economy is Policy options expected to trend back to potential, growing at To sustain recovery momentum, efforts to around 6 percent. The new Law on Investment, contain COVID-19 infections must continue. together with the newly ratified Cambodia-China Supported by the World Health Organization, Free Trade Agreement and Regional Cambodian authorities are building surveillance Comprehensive Economic Partnership, is expected with community engagement to strengthen early to boost investment and trade in the coming years. detection. In addition, guidelines on the integration Similarly, trade and investment will be further of COVID-19 services into a single healthcare boosted when the Cambodia-Republic of Korea system have been introduced, and all healthcare free trade agreement is ratified. However, the facilities have been advised to implement the negative impacts of the coronavirus on jobs and guidelines throughout the country. welfare are expected to continue as the services sectors, especially the travel, tourism, and Given that external demand conditions will hospitality industries, continue to face persistent remain uncertain, strengthening domestic headwinds. market confidence will be crucial. It is therefore important to promote investor confidence at home Challenges and risks to boost domestic economic activity. Taking advantage of the newly rehabilitated road networks Risks to the forecast are tilted to the downside. in Siem Reap and Sihanoukville, as well as the Despite stronger domestic economic activity Phnom Penh-Sihanoukville Expressway (which is supported by the rollback of mobility restrictions, expected to be completed and launched in the recovery has been held back by the deterioration of second half of 2022), further attracting private global demand conditions and the global investment in the tourism sector, while commodity price shock. Specifically, Cambodia’s implementing tourism development strategies such export-oriented manufacturing is expected to face as the Siem Reap Tourism Development headwinds in the coming months, with a less Masterplan for 2021–35, will help. As the country favorable external environment, reshaped by a continues to relax all travel restrictions, cyclical slowdown in the United States. The zero- international arrivals should return, contributing to COVID policy and structural slowdown in China, the revival of the tourism and hospitality industry. which is the largest source of FDI for Cambodia, is expected to constrain investment. An More efforts are needed to promote unmanageable resurgence of Omicron or new agricultural commodity exports for Cambodia variants could disrupt economic recovery. While to maximize the benefits of the newly ratified 25 CAMBODIA ECONOMIC UPDATE JUNE 2022 bilateral and multilateral free trade Depending on the magnitude of the oil price agreements, namely, the CCFTA and RCEP. In shock, measures to mitigate its negative this regard, incentives currently introduced under impacts may need to be introduced. Targeted the new investment law to support agroprocessing relief and support are likely to be more cost- and agricultural value chains play a key role. While effective than a blanket and broad-based petroleum Cambodia’s agricultural commodity prices at the tax reduction measure. In this connection, farmgate remain competitive, interest rates on consideration should be given to more targeted loans, the cost of energy for the agroprocessing social assistance measures that directly mitigate the industry, and logistics and transportation costs for impacts on those most in need, especially agricultural commodity exports are not. Unlike vulnerable households, poor farmers, and small and electronics, equipment, and parts, agricultural micro household enterprises. Rising inflationary commodities are heavy and relatively cheap cargo, pressures are posing serious policy challenges for which are being affected disproportionally by rising Cambodian authorities. To this end, it is crucial for ocean freight costs. the central bank to continue to be committed to maintaining exchange rate stability. For the Therefore, further efforts must be made to government, it is important to avoid creating excess strengthen trade facilitation while aggregate demand, which may trigger undue implementing multimodal transport domestic inflationary pressures on top of the connectivity. This is particularly crucial for imported ones. The prospect of a protracted period Cambodia’s agricultural commodity exports if the of high inflation and a sharp increase in global country is committed to taking full advantage of the interest rates has significant implications for CCFTA and RCEP. At the same time, it is essential Cambodia, whose economy is highly dollarized. to continue to address supply-side bottlenecks by reducing the costs of doing business, energy, and licensing, while promoting access to finance, especially for the export sector, to revive external competitiveness. In addition, an important policy consideration is to take advantage of strong FDI inflows. Backward linkages between the FDI sector and the domestic small and medium-sized enterprises sector must be further fostered to boost job creation and growth. 26 CAMBODIA ECONOMIC UPDATE JUNE 2022 SPECIAL FOCUS: POST-PANDEMIC SUPPLY CHAIN DISRUPTIONS: STRATEGIES TO REDUCE LOGISTICS COSTS 27 CAMBODIA ECONOMIC UPDATE JUNE 2022 SPECIAL FOCUS: POST-PANDEMIC SUPPLY CHAIN DISRUPTIONS: STRATEGIES TO REDUCE LOGISTICS COSTS19 EXECUTIVE SUMMARY This Special Focus assesses the effects of supply chain disruptions on Cambodia’s trade and freight flows in the wake of the COVID-19 pandemic and develops recommendations to strengthen Cambodia’s competitive advantage for a stronger and faster economic recovery. Specifically, it sheds lights on the drivers of Cambodia’s high logistic costs and presents specific measures that can help the Cambodian government design strategies to address the weak links in the supply chain. The pandemic has resulted in unprecedented global supply chain disruptions, which do not yet show clear signs of waning.20 Within this context, transformative reforms have become even more pressing, as the Cambodian economy shrunk by about 3.1 percent in 2020, with key economic activities such as exports and tourism severely affected. 21 In early 2020, hundreds of garment factories suspended operations caused by disruptions in the imports of raw materials from China. Cambodia is one of key exporters of agricultural commodities, especially rice, and the temporary container shortage struck the country’s rice exports, especially to Europe. Agricultural commodities, especially rice, which is heavier and cheaper cargo, compared to other products such as electronics, were hard hit by rising ocean freight rates. While the economy is projected to recover, growing at 4.5 percent in 2022, long-term growth will depend on public policy choices and reforms to ensure a quick rebound of the country’s trade sector. Increased integration into regional and global value chains has made efficient logistics and supply chains central to Cambodia’s development strategy and an important prerequisite to move to higher- income status. Cambodia sustained an average annual real growth rate of 7.6 percent between 1995 and 2019, before the pandemic hit, making it one of the fastest-growing economies in the world. The economy reached a lower middle-income status in 2015. Rapid growth was driven by garment manufacturing, tourism and, more recently, construction and real estate. While impressive, the economy lacks a diversified base. For decades, Cambodia’s exports have been heavily dependent on only three main products: garment, travel and footwear (GTF), which combined account for 65 percent of total goods exports. While Cambodia’s slow progress to further diversify can be attributed to many factors, the country’s persistently high logistics costs and weak links in the supply chain are a major bottleneck to the country’s competitiveness. With trade and, in particular, exports, being a crucial growth engine of the Cambodian economy, smart logistics solutions and efficient supply chain management are a precondition for ensuring the competitiveness of the Cambodian economy in the long term. By 2030, it is expected that Cambodian firms will move four times more goods through highways, ports, airports, and warehouses than currently. 22 However, the country’s logistics costs per GDP is significantly higher than in comparable ASEAN countries and was estimated at 26.43 percent of GDP in 2020. In particular the total cost of holding inventory, referred to as inventory carrying cost is particularly high in Cambodia, with an estimated value equivalent to about 13 percent of GDP (2020), implying high uncertainty in the supply chain. Increasing supply chain reliability and service quality is key to improving Cambodia’s logistics performance, as predictability is not just a matter of time and cost but also a component of shipment quality. Several causes of delays or unreliability are amendable to interventions by the Cambodian government 19 This Special Focus was authored and prepared under the leadership of Cordula Rastogi and Sodeth Ly, with contributions from Professor Ruth Banomyong, Paul Apthron, Paitoon Varadejsatitwong, Daria Ulybina, Lucie Wuester, Satya Prasad Sahu, and Kimyean Ky. The authors wish to thank Sadig Aliyev, Chanin Manopiniwes, and Heidi Stensland for their comments and suggestions, and Diane Stamm, who edited the report. 20 World Bank 2022. 21 United Nations Industrial Development Organization 2020. Impact assessment of COVID-19 on Cambodia’s manufacturing firms. See https://www.unido.org/sites/default/files/files/2021- 03/UNIDO%20COVID19%20Assessment_Cambodia_FINAL.pdf 22 World Bank 2018. 28 CAMBODIA ECONOMIC UPDATE JUNE 2022 such as for example the quality of service or the cost and speed of clearance processes. But others, such as the dependence on indirect maritime shipping routes and transshipment ports in the region lie outside the domestic supply chain and are not under the country’s control. Increased reliability of supply chains increases Cambodia’s comparative advantage, and in particular in a time of increased uncertainty, many shippers are willing to pay a premium for predictable delivery of shipment. This Special Focus concludes that strategies that focus on reducing national logistics costs and addressing weak links in the supply chain in Cambodia are the optimal policy response to shocks, as they aim to increase efficiencies and contribute to strengthening the resilience of firms. Those supply chains form a complicated system where any disruption, at any possible level, can affect the entire distribution network. As is well known, supply chains can only be as strong as their weakest link, and this is especially important for Cambodia, where the transport and storage sector currently account for about 8 percent of the country’s GDP.23 As presented in the report, drivers of high costs and uncertainty reportedly include (i) high transaction and transportation costs, including prevalence of informal payments, (ii) fragmented intermodal and logistics planning with railways playing an insignificant role, (iii) shipping concentration with cascading effects, and (iv) seemingly phasing out of automated customs processing (green lane), triggering additional physical interactions and post-clearance audit impacting productivity. Cambodia’s infrastructure remains underdeveloped, and the country’s performance in logistics has been significantly below other countries in the region, thereby triggering higher costs. Those costs represent not only monetary expenses, but also lack of reliability (and thus higher lead times), which is the main source of logistics costs. Supply chain management initiatives generally target reliability, with a focus on inventory holding, upgrading services, express delivery, contractual penalties, and visibility. Joint efforts by the Cambodian government, the private sector, and development partners have been deployed to address some of these bottlenecks. Further developments have been taking place to resolve some of the main challenges faced by Cambodian firms. As part of the 18th Government-Private Sector Forum, held on March 2019 the government announced several initiatives to reduce logistics costs, including for example the removal of Camcontrol from landborder checkpoints and Camsab from ports. The government’s recently launched “The Strategic Framework and Programs for Economic Recovery in the Context of Living with the COVID-19 in a New Normal 2021-2023” also aims to build the foundation for economic growth, targets diversification and competitiveness, and puts improvements of the logistics sector front and center. As such, the government puts renewed emphasis on addressing the high logistics costs and is currently preparing a comprehensive Logistics and Intermodal Masterplan for Cambodia (2022‒2023). The objective of the Masterplan is to reduce logistics costs and make cross-border supply chains more transparent and the process seamless. The Masterplan is built around the development of a hub-and-spoke system that services trade and domestic freight movement along three major axes (northwest, southeast, and southwest), with secondary connections (coastal, northern, and northeast), while linking four hubs (Sihanoukville, Phnom Penh, Battambang, and Siem Reap) with two cross-border links (Poipet and Bavet), referred to as the “3342” comprehensive logistics development plan24. In conjunction with a well-targeted program of investments, policy and institutional reforms are needed to enhance the efficiency of logistics and supply chains. This can improve Cambodia’s competitiveness, facilitate international trade, and enhance its connectivity to better serve consumers and meet the needs of regionally integrated facilities for reliable delivery of inputs and outputs. This Special Focus identifies selected policy measures that could foster logistics and supply chain reforms in the short term and in the medium to longer term, as shown in table S.ES1. The remaining sections of the Special Focus review (i) global supply chain uncertainties in the wake of COVID-19, (ii) trade flows and supply chain configurations in Cambodia, (iii) logistics costs per GDP and (iv) drivers for high costs and unreliability, before describing in detail specific short term and medium-longer term measures that can help the Cambodian government design strategies to address the weak links in the supply chain. 23OECD 2022. 24“3343” refers to three major axes (northwest, southeast and southwest corridors), three secondary links (coastal, northern and northeast corridor), 2 cross-border links (Poipet-Sisophon and Bavet-Svay Rieng) and 4 hubs (Siem Reap, Battambang, Phnom Penh, Sihanoukville). 29 CAMBODIA ECONOMIC UPDATE JUNE 2022 Table S.ES.1. Selected policy measures to foster logistics and supply chain reforms In the SHORT TERM (1-2 years) In the MEDIUM TO LONGER TERM (2-5 years) Issues: Excessive margins by shipper nominated and global logistics brands Issue: A very low level of transit of goods Measures: Monitor efficiency of main trade gateways with regular progress Measures: Facilitate transit of goods : Develop and implement reliable transit solutions, updates: Establish a comprehensive monitoring system to assess the performance of the ports and with bonded transport and guarantee systems to take advantage of goods in transit as regional supply benchmark them against similar ports in neighboring countries. Indicators could include operational chains develop. efficiency, financial performance, dwell time, charges, and handling fees, among others. Effective implementation also includes updates on progress of performance indicators to the government which should be done on a regular basis, at least quarterly. Issues: Time-consuming control procedures and lack of professionalism path to “a path to Issue: Transport and logistics fragmentation Authorised Economic Operators (AEOs) in logistics Measures: Develop the Comprehensive Masterplan for Multimodal Measures: Expand the “Best Trader scheme” to the wider logistics sector: Transportation and Logistics (2022-203) : Finalize the Comprehensive Masterplan for Prioritize the expansion of the Best Trader scheme in the logistics sector and ensure implementation Multimodal Transportation and Logistics (2022-2030) with sequencing and prioritization and a to include for example customs clearance agents (Best Clearance) and possibly trucking companies focus on smart logistics solutions and oversight and strengthening cross-border transport collaboration (Best Trucker), which is expected to be a major step toward the professionalism needed in the sector. with Vietnam and Thailand, with a vision for modal development. Issues: Uncoordinated and unpredictable implementation of various rules and regulations Issues: Sprawling urban centers are creating issues for transport and logisitcs Measures: Institutionalize “ROADWATCH ,” supported by a hotline for Measures: Champion urban logistics initiative and planning: Introduce incentives traders and citizens to report irregularities: Establish a team, and local authorities and measures to take into account commercial freight movements in urban development plans under dedicated to facilitating trade with hotline support, enforcing the famous catchword a public-private dialogue platform. “ROADWATCH” on facilitation of road transport (earlier introduced by the government). Issues: Railways play an insignificant role Issues: Lack of logistics support for micro-, small and medium sized enterprises and small traders in Measures: Assign a review team and confirm a business plan for railways: cold chain and e-commerce Develop a reform and business plan for the railway sector with a 10-year time horizon, jointly led Measures: Promote specialized logistics and e-commerce : Develop and implement by the MEF and MPWT in consultation with the private sector to ensure that railways meet a plan with the aim to support small producers getting their produce into a cost-effective cold chain to customer demands for efficient and reliable service. urban centers, while attracting the private sector to develop a domestic distribution network for fresh produce. Issue: rising inspection requirements Issue: Insufficient transport and logistics standards Measures: Promote automation, improve transparency and eliminate human Measures: Ensure access to most up-to-date logistics-related legislation : interaction in the customs clearance process : Streamline existing processes By Publish all primary and secondary legislation in a single database. Alternatively, or until this is removing “face-vetting” and accepting digital signature, and using full automation of risk-based implemented, each public agency, authority, and/or ministry operating in the logistics sector should system to assign lanes (green/blue/yellow/red) publish a complete list of legislation it administers on its website, along with its status. Issues: Old trucking fleet, causing high operating costs, traffic accidents, and pollution Issue: Congestion and accidents Measures: Further rationalize duty and special taxes on new truck imports: Measures: Support real-time visibility and transparency of freight movements : Rationalize truck import tariffs to encourage the re-equipping of the fleet with larger, modern Identify and operationalize a first information exchange that will support a more resilient and fluid vehicles appropriate to providing a high level of service. This could be accompanied by a vehicle supply chain in cooperation with a variety of stakeholders, including commitments by the government scrapping program. to support fluidity, especially linked with the monitoring of efficiency of global trade gateways, building on ongoing achievements. 30 CAMBODIA ECONOMIC UPDATE JUNE 2022 Global Supply Chain Uncertainties in the Wake of the COVID-19 Pandemic The unprecedented disruptions of global supply chains currently being experienced do not yet show clear signs of waning. The container shipping disruptions in the wake of the COVID-19 pandemic have had cascading effects along the entire supply chain network. At the root of the disruptions is a combination of a strong demand for goods after the start of the pandemic and operational disruptions in shipping. These disruptions originated on the land side, with major congestion in the West Coast of the United States, and COVID-19-related lockdowns of key port cities, notably in China. Shipping reliability has dropped to unprecedentedly low levels (Figure S.1), with rates increasing eightfold on certain routes (Figure S.2). Globally, 20 percent of container vessels are waiting outside a congested port; of those, close to 30 percent were in China as of April 2022. 25 Historically high shipping rates declined slightly in January 2022, and at a faster pace in March 2022. Figure S.1. Supply chain capacity stress (stalled Figure S.2. Shanghai Containerized Freight Index, ship capacity, million TEUs) and traffic delays weekly spot rates through March 2022 (hours) through April 2022 Thousands 14 Million TEUs days 12 3 20 10 2 15 8 2 6 10 4 1 5 2 1 0 - 0 Nov-19 Nov-20 Nov-21 Jul-19 Jul-20 Jul-21 Sep-19 Sep-20 May-19 Sep-21 Jan-19 Mar-19 May-20 Jan-20 Mar-20 May-21 Jan-21 Mar-21 Jan-22 Mar-22 Jul-17 Oct-17 Jul-18 Oct-18 Jul-19 Apr-17 Oct-19 Jul-20 Apr-18 Oct-20 Jul-21 Apr-19 Oct-21 Apr-20 Jan-17 Apr-21 Apr-22 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 capacity stress (global), LHS Shanghai-East Coast North America (base port) $/FEU Shanghai-South America (Santos) $/TEU traffic delays (North America West Coast), RHS Shanghai-West Coast North America (base port) $/FEU Shanghai-Europe (base port) $/TEU Sources: World Bank staff based on calculations from AIS data Shanghai-West Africa (Lagos) $/TEU (Marine Traffic). The indicators represent the excess capacity of Source: World Bank 2022. ships not moving that should move under normal circumstances. Note: FEU = forty-foot equivalent unit; TEU = twenty-foot Note: TEU = twenty-foot equivalent unit. equivalent unit. With supply chain uncertainty at the global level prevailing for the unforeseeable future, impacts in the form of shortages, price increases, and long lead times for goods are expected. As a result of the ongoing pandemic and other disruptions, supply chains will be forced to continuously adapt. The massive disruptions of the last 18 months have meant that the availability of goods at the scheduled time can no longer be taken for granted. This has resulted in the relatively low reliability of global supply chains, with only one-third of ships arriving at the scheduled time, and considerably longer lead times (double or more). Change is inevitable in supply chains, and adjustments are ongoing as firms shift their strategies and consumers their spending habits. It appears the crisis is engendering a transformation in supply chain management moving from efficiency to resilience, captured in the Financial Times headline, “Supply chains: companies shift from ‘just in time’ to ‘just in case.” 26 Looking inward to address national logistics inefficiencies appears to be the optimal policy response by fast-growing countries, such as Cambodia. In recent decades, the reduction of logistics costs worldwide has been driven more by a decline in inventory costs than by a decrease in transportation costs. Reduction of inventories has been achieved thanks to the high level of reliability of service delivery, mostly in advanced and emerging economies. In most countries with high logistics costs, such as Cambodia, it is often not the distance between trading partners, but the reliability of the supply chain that is the most important contributor to those costs. As such, logistics performance is associated with the level of service delivery that can typically be achieved in a country. The quality of service and reliability of a supply chain 25 World Bank 2022. 26 Masters and Edgecliffe-Johnson 2021. 31 CAMBODIA ECONOMIC UPDATE JUNE 2022 to a given destination refers to how predictable the end-to-end delivery is, not just the cost (and time) it takes to get there (Figure S.3). 27 Figure S.3. Logistics costs: relative importance of reliability Sources: United Nations Conference on Trade and Development (UNCTAD), based on Council of Supply Chain Management Professionals’ “Annual State of Logistics Report” and Kearney Management Consulting Company. 27 Arvis et al. 2007. 32 CAMBODIA ECONOMIC UPDATE JUNE 2022 Trade Flows and Supply Chain Configurations in Cambodia Cambodia’s trade flows and supply chains are highly concentrated. Imports come almost entirely from the East Asia and Pacific region, while over a third of exports go to the United States (Figure S.4.). Transit trade is almost entirely concentrated between Vietnam and Thailand. Some trends are noteworthy: (a) during 2018‒2020, China also accounted for a third of imports, while Thailand and Vietnam accounted for another third; (b) China, Thailand and Vietnam account for over two-thirds of imports in volume terms (Figure S.5). The share of exports to North America has risen especially in 2021 on the back of rising textile exports. In volume terms, exports to the United States, Vietnam, and China all rose during 2019‒2021 and account for about a quarter of total exports each, dominated by textiles to the United States and rice and minerals (sand) to Vietnam and China. 28 Figure S.4. Share of top 3 exporter destinations, US$ Figure S.5. Share of top 3 import origins, US$ and gross weight, 2018‒2021 and gross weight, 2018‒2021 Source: Customs Data, Cambodia GDCE. Source: Customs Data, Cambodia GDCE. Note: Excluding gold in raw form (imports) and banknotes (export). Note: Excluding gold in raw form (imports) and banknotes (export). Cambodia is integrated into global and regional value chains (GRVC) in a few or concentrated sectors with some achievements in trade diversification (notable in solar photovoltaic (PV) value chain, bicycles, vehicles, and electronical parts and cables). See the section on goods exports under the recent economic developments and outlook part for more details. Textile, clothing, and footwear (TCF) products accounted for over half of export value (Figure S.6) and a fifth of import value in 2021 (Figure S.7), down from almost over two-thirds and a third in 2018, respectively, reflecting initial achievements in product diversification, notably with novel export growth in the solar PV value chain. Imports are dominated by (knitted) fabrics and other inputs into the TCF manufacturing sector, and exports consist of final goods, mostly clothes and shoes, of which almost half goes to the United States and Canada and over a quarter of which goes to the European Union (EU27). This reflects a lack of backward linkages 29, tied to strongly foreign direct investment-driven export sector growth, but a lagging manufacturing small and medium- sized enterprise sector, which limits potential impacts of global value chain participation on value added and jobs in Cambodia. Cambodia also exports bicycles, notably to the EU, UK, and United States. In 2018, 28 We exclude exports of banknotes, as we consider solely merchandise trade, which, however, accounted for over one-third of total export value, on average, in 2018‒21. 29 “Typically, a relatively higher share of foreign value-added from foreign input providers (so-called “backward” GVC linkages) can indicate a higher exposure to foreign supply shocks affecting vendors of raw materials and intermediates. Conversely, a higher reliance of exports of a given country on demand from foreign countries (so-called “forward” GVC linkages) can mean higher exposure to demand shocks coming from final consumers or distributive services abroad” (OECD, 2021). 33 CAMBODIA ECONOMIC UPDATE JUNE 2022 Cambodia began exporting solar PV semiconductors, largely to the United States, the value of which rose sharply, from US$6.8 million in 2018 to US$57.5 million in 2021. Figure S.6. Exports to top destination, by sector, US$ and gross weight, 2018‒2021 Source: Customs Data, Cambodia GDCE. Cambodia is also an important exporter of rice. During the pandemic, rice exports dipped in the third quarter of 2020, but recovered in the fourth quarter, following the same trend in value and volume terms 30. The decline in exports started in June 2020, in line with global shortages and shipping disruptions, bottomed out in August 2020, and recovered thereafter. The rise in the fourth quarter of 2020 largely reflects rising exports to China. The Chinese market now captures almost half of Cambodia’s milled rice exports, up from about 30 percent in 2018, due to the Chinese 400,000-ton allowance under its duty-free and quota-free regime, and to its proximity notably as compared to the European market. The European market also had additional safeguards on Cambodian rice until January 2022. It is notable that in April 2020 (and to a lesser extent in May), all rice exports were physically inspected (red lane customs processing), but shifted to the blue lane 31 thereafter 32, with an overall smaller share of rice exports going through the yellow lane 33 compared to the period before the onset of the pandemic. 30 Most rice export from Cambodia is milled rice, according to Customs statistics. Any rice other than “semi- or wholly milled” accounts for a small share (no more than US$1 million per month, with the exception of March 2020, when semi- or wholly milled rice was exported, one-third of which went to China. About two-thirds of Cambodia’s rice exports are paddy, not shown in the statistics. 31 Same treatment as green lane but with specific recommendation to conduct a post-clearance audit. 32 After acceptance of the Single Administrative Document (SAD), the customs officer shall initiate – through ASYCUDA – an assessment and assign the SAD to one of four lanes according to predetermined risk management criteria: (1) Green lane – SAD is automatically assessed and an assessment notice is used (may be subject to post- clearance audit), (2) Blue lane – the SAD is provided the same treatment as the green lane but with specific recommendation to conduct a post-clearance audit, (3) Yellow lane – the SAD must be checked against the submitted documents before rerouting to the green lane, and (4) Red lane – the SAD must be checked against submitted documents and the goods are subject to physical inspection before rerouting the SAD to the green lane (https://cambodiantr.gov.kh/index.php?r=searchProcedure/view1&id=61). 33 The SAD must be checked against the submitted documents before rerouting to the green lane. 34 CAMBODIA ECONOMIC UPDATE JUNE 2022 Figure S.7. Imports from top countries of origin, by sector, US$ and gross weight, 2018‒2021 Source: Customs data, Cambodia GDCE. The disruptions associated with the COVID-19 pandemic has had relatively little impact on trade flows, and recovery has been fast, also linked to relatively short backward linkages (or lack thereof). Exports continued to rise year over year throughout 2018–2021 (with a contraction in March–April 2020 but recovery in July 2020). This was mainly due to both supply chain disruptions during April–May 2020 with lockdowns (Figure S.8), and the decline in demand for Cambodia’s exports (consumer goods). Imports contracted very little in 2020 (February–September) and exceeded 2018 levels in 2021, indicating a recovery; however, in volume terms, imports remain slightly subdued (mostly on the back of lower import volumes of some goods, in particular coal and cement) 34. There has been little impact on imports of manufacturing inputs and exports of GRVC goods (TCF exports contracted in March–May 2020 but recovered, [especially to the United States] beyond pre-pandemic levels) (Figure S.9). In February 2020, there was a lack of inputs for the garment industries due to supply chain disruptions (Figure S.10). 35 34 In volume terms, imports of coal and cement declined to 3.17 million metric tons (19.1 percent of total) and 0.67 million metric tons (4.1 percent of total imports) in 2021, respectively, down from 3.59 million metric tons (21.1 percent of total) and 1.02 million metric tons (6.0 percent of total imports) in 2020, respectively. 35 The Cambodian prime minister had to appeal to the Chinese government to send ships loaded with fabric to Cambodia for garment production, and then the decline in global demand hit Cambodia’s exports a few months later. 35 CAMBODIA ECONOMIC UPDATE JUNE 2022 Figure S.8. Dynamics of total export/import, Figure S.9. Dynamics of TCF GRVC exports, billion US$ and tons millions, 2018‒2021 quarterly, 2018–2021 10.00 6.00 Millions, tons Billions, US$ 8.00 4.00 6.00 4.00 2.00 2.00 0.00 0.00 2018 Q1 2018 Q3 2019 Q1 2019 Q3 2020 Q1 2020 Q3 2021 Q1 Import Gross Weight tons 2021 Q3 Export Gross Weight tons Import Value USD Export Value USD Source: Customs Data, Cambodia GDCE. Source: Customs Data, Cambodia GDCE. Figure S.10. Dynamics of TCF GRVC Imports, Figure S.11. PPAP and SAP Cargo Throughput, quarterly, 2018–2021 volume, 2018–2021 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2018 2019 2020 2021 Total Cargo Throughput at SAP Containerized cargo at SAP Containerized cargo at PPAP Sources: MPWT, SAP, and PPAP. Source: Customs Data, Cambodia GDCE. As in many countries, trade in Cambodia is largely transported via sea, inland waterways, and road, with high-value goods shipped by air. In volume terms, exports via sea showed high fluctuation until July 2021, having bottomed out in February 2020, May 2020, and May 2021; imports via sea dipped in February 2020 and recovered in September 2020, in line with supply chain disruptions – rising further thereafter. Export volumes via inland waterways exceeded volumes transported via sea during December– July 2020, on the back of large volumes of natural sand exports to Vietnam. Air cargo accounts for less than 10 percent of exports in all years in value terms, spiking to 20 percent in 2020 on the back of gold exports. It is notable that TCF exports to North America are shipped by sea and inland waterways and recovered by June 2020 in both value and volume terms (Figure S.12). 36 CAMBODIA ECONOMIC UPDATE JUNE 2022 Figure S.12. Main exit offices on export routes, by selected countries, volume and US$, 2018–2021 Source: Customs Data, Cambodia GDCE. The two major trade gateways for the country, Phnom Penh Autonomous Port (PPAP) and Sihanoukville Autonomous Port (SAP), showed “resilience” in the wake of the COVID-19 pandemic (Figure S.11). Handling at both ports remained relatively stable, with small fluctuations, and recovered within the third quarter of 2020. Located along the Mekong River, PPAP’s import-export container volume in 2021 was about half that of SAP; the former handling 348,898 import-export containers (107,911 empty and 240,988 full) in 2021. The average container load in SAP and PPAP was 28 Figure S.13. SAP total number of port calls, Figure S.14. SAP distribution of container traffic: 2019–April 2022 arrivals and departures, monthly, 01/2020– 04/2022 450 100 400 90 90000 130% 350 80 80000 Number of ships calling 70 110% 300 70000 90% YoY percent change 60 250 60000 70% 50 50000 200 50% TEUs 40 40000 30% 150 30 30000 10% 100 20 20000 -10% 50 10 10000 -30% 0 0 0 -50% 2019 2020 2021 2022 FEEDER FEEDERMAX ARRIVAL (YoY PCTCH) DEPARTURE (YoY PCTCH) SMALL FEEDER Num. unique ships (right axis) ARRIVAL DEPARTURE Source: Marine Traffic data and measurements of ports arrivals and departures. Note: Small feeder (up to 1,000 TEUs), Feeder (around 2,000 TEUs), Source: Marine Traffic data and measurements of ports arrivals and Feedermax (around 3,000 TEUs). departures. 37 CAMBODIA ECONOMIC UPDATE JUNE 2022 metric tons and 24 metric tons, respectively. 36 Both ports have a containerization rate of about 70 percent, which has been growing significantly over the years.37 They are operated as commercial state-owned enterprises and are overseen by the Ministry of Public Works and Transport and the Ministry of Economy and Finance. SAP, the country’s only seaport, can accommodate general cargo vessels with 50,000 deadweight tonnage (DWT) and container vessels of 20,000 DWT, with a loading capacity of approximately 1,600 twenty-foot equivalent units (TEUs) 38. In the foreseeable future, SAP is expected to remain a feeder port, relying on ships coming from hub ports, especially for trade with countries outside the East Asia region, adding an extra link to the voyage. To accommodate larger container vessels, SAP with support from the government and financing from the Japan International Cooperation Agency (JICA) is expanding in phases its facilities by increasing the depth of the port to 14.7 meter and building a new container terminal. Despite not being able to accommodate larger vessels, over 94 different containerships called at SAP at least once in 2019, indicating port capacity and ability to handle more containerships. This number dropped slightly in the following two years to 84 ships in 2020 and 81 ships 2021 (Figure S.13). During the same period, the overall number of port calls dropped from over 500 in 2019 to about 480 in 2020. This trend is likely to be attributed to the pandemic. In contrast to the overall trend, in 2021, Sihanoukville Port accepted over twice as many small feeders as it did in 2020 (104 in 2021 compared to 41 in 2020). Large fluctuations of the overall port throughput during 2020–21 also demonstrate effects of COVID-19 resulting in port disruptions and unpredictability of operations (Figure S.14). While outbound trade with the United States and EU-27 are mostly transshipped in Singapore; Hong Kong SAR, China; or Cai Mep, 39 (Figure S.15) maritime connectivity to East Asia is direct. Inbound traffic comes from China, Vietnam, and Singapore, while Malaysian ports started to gain market share starting in late 2020, and now represent about 4 percent of all inbound container traffic in SAP per month (Figure S.16). Figure S.15. Cambodia’s container shipping Figure S.16. SAP port calls by destination country, connectivity number (outbound) 60 50 40 30 20 10 0 2019-01 2019-03 2019-05 2019-07 2019-09 2019-11 2020-01 2020-03 2020-05 2020-07 2020-09 2020-11 2021-01 2021-03 2021-05 2021-07 2021-09 2021-11 2022-01 2022-03 China Hong Kong Malaysia Philippines Singapore Taiwan Thailand Viet Nam Source: Authors. Source: Marine Traffic data and measurements of ports arrivals and departures. Customs processing of export and import declarations is highly concentrated, with the Export Management Department handling customs clearance of about half of the country’s trade. In volume terms, over a third of exports exit via sea through Sihanoukville Port Customs and Excises Brand (CEB), followed by Phnom Penh Port Customs and Excise Office (CEO) (for shipping via inland waterways largely to North America), Kaorm Sormnor CEO (inland waterway regional), and Bavet CEO (to North America) (which together account for almost half of exports). Just under half of exported goods are lodged at the Export Management Department (notably from 2020–21). For imports, goods mostly 36 PPAP’s gross weight limit is 25 tons/20-foot and 30 tons/40-foot. 37 SAP’s containerization rate is even higher if liquid bulk is not considered. 38 OECD 2022. 39 Cai Mep has become a major transshipment port for freight originating from or destined for Cambodia. This explains the rapid growth in the throughput of the new PPAP container terminal, which is reachable in 36 hours’ transit time to and from Cai Mep. 38 CAMBODIA ECONOMIC UPDATE JUNE 2022 enter through Streung Hao CEO, Sihanoukville Port CEB, and Kaorm Sormnor CEO (about a fifth each) and are mostly lodged at the Export Management Department, Sihanoukville’s Special Economic Zone (SEZ) (Krong Preah Sihanouk SEZ CEO), and Sihanoukville Port CEB (between 14 and 17 percent each) (Figure S.17 and Figure S.18). Figure S.17. Main export routes by exit office, mode of transport, office of lodgment, and import region, gross weight and value, 2018–2021 Source: Customs Data, Cambodia GDCE. Note: Green = sea, red = inland waterway, blue = road, orange = air. Includes routes through which at least 150,000 tons pass in any of the years considered. Source: Customs Data, Cambodia GDCE. Note: Green = sea, red = inland waterway, blue = road, orange = air. Includes routes through which at least US$100 million pass in any of the years considered. 39 CAMBODIA ECONOMIC UPDATE JUNE 2022 Figure S.18. Main import routes by entry office, mode of transport, office of lodgment, and export region, gross weight and value, 2018–2021 Source: Customs Data, Cambodia GDCE. Note: Green = sea, red = inland waterway, blue = road, orange =air. Includes routes through which at least 150,000 tons pass in any of the year considered. Source: Customs Data, Cambodia GDCE. Note: Green = sea, red = inland waterway, blue = road, orange = air. Includes routes through which at least US$100 million pass in any of the years considered. 40 CAMBODIA ECONOMIC UPDATE JUNE 2022 Inland movement of export-import goods are mainly done by trucking, with Royal Railways playing a negligible role in handling containerized import and export shipments. It is estimated that the share of road transportation for both passenger and freight represent about 90 percent. 42 Rail freight transport was almost nonexistent in 2010 due to serious infrastructure deterioration. To date, railways have Figure S.19. Royal Railways: export loaded and Figure S.20. Royal Railways: export loaded and empty containers along Southern Line 40, quarterly, empty containers along Northern Line 41, 2021 quarterly, 2021 20,000 1,200 1,000 15,000 800 10,000 600 400 5,000 200 - - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Export Loaded Export Empty Import Loaded Import Empty Export Loaded Export Loaded Import Loaded Import Empty Source: Royal Railways 2022. Source: Royal Railways 2022. a small market share of about 6 to 7 percent (during 2018–2021), carrying about 10 percent of all fully loaded export containers to PPAP along the southern line. In 2021, it also repositioned about 26 percent of empty import containers along the same line (down from 40 percent in 2018) (Figure S.19 and Figure S.20). Given that the railways run six to seven services a day each way, capacity is estimated at about 6,000 to 7,000 containers a month. Monthly figures from Royal Railways show a freight turnover of about 3,000 to 5,000 a month, which indicates that there is sufficient capacity on the railways to take up a larger share of current import-export shipments. The Northern Line, linking Phnom Penh to the bridge at Poi Pet border, which was officially inaugurated in 2019, has negligible traffic, while the line would be a suitable alternative. For international transit, trade through Cambodia is small in volume, although rising, with future potential to grow depending on the regional production network configuration. Transit trade volumes have risen from 41,000 tons in 2018 to 144,000 tons in 2020 and 102,000 tons in 2021. The spike in 2020 is likely related to shipping and logistics disruptions in the wake of the COVID-19 pandemic. The number of containerized transactions rose threefold in 2021 and stands at almost 90 percent; during 2018– 2021, 70 percent of transit volume was containerized. Almost all transit flows (96 percent) are between Thailand and Vietnam (both directions but over half is from Vietnam to Thailand, for which almost all transactions have been containerized since 2019) (Figure S.21). 40 The Southern Line runs from Phnom Penh to Sihanoukville. https://www.mpwt.gov.kh/en/public- services/railway-services 41 The Northern Line runs from Phnom Penh to Poipet. https://www.mpwt.gov.kh/en/public-services/railway- services 42 ADB 2019. 41 CAMBODIA ECONOMIC UPDATE JUNE 2022 Figure S.21. Transit traffic linking Vietnam and Thailand, gross weight, percentage, 2018–2021 Source: Customs Data, Cambodia GDCE. Despite Cambodia’s advantageous geographic location, central to the Greater Mekong Subregion, transit trade is small, routes are highly concentrated, and a quarter of all movements happened on six days (2018–2021), suggesting complicated procedures and forming of convoys (Figure S. 22). From Vietnam to Thailand, most transit was lodged in Chrey Thom CEO and exited through Doung CEO in 2020 (72.2 percent of total transit in this direction in 2020), while in 2021, most transit was lodged in Prey Vor CEO and exited through Poipet CEO (53.6 percent). In the other direction, transit trade routes are more diverse, being mostly lodged in Boeung Trorkuon CEO (exiting mostly through Peam Montea CEO and Torn Horn CEO in 2020–21), Poipet CEO (exiting through Bavet CEO and starting in 2021 also through Prey Vor CEO), O’Anlouk CEO (mostly exiting through Chrey Thom CEO and only important in 2018–19), and Doung CEO (exiting through Chrey Thom CEO and Trorpeang Plong CEO, mostly in 2020–21). Figure S.22. Transit trade fluctuations, gross weight, January 1, 2018–December 1, 2021 Source: Customs Data, Cambodia GDCE. Logistics Costs Per GDP in Cambodia Preliminary results of work undertaken as part of this Special Focus suggests that national logistics costs in Cambodia are significantly higher than in comparable Association of Southeast Asian 42 CAMBODIA ECONOMIC UPDATE JUNE 2022 Nation (ASEAN) countries and estimated at 26.43 percent of GDP in 2020 43 (Figure S. 23). Differences in methodologies to calculate logistics costs per GDP may provide some explanation of this gap. However, when compared with Thailand, which is based on a similar methodology, several conclusions can be drawn. First, the difference between Thailand and Cambodia relates to inventory carrying cost, with a gap of almost 8 percent, as Thailand’s inventory carrying cost is estimated at 5.3 percent compared to 13.07 percent for Cambodia. Higher inventory cost in Cambodia seems to result from higher lending Figure S.23. Comparative logistics costs per GDP in Figure S.24. Evolution of Cambodia’s logistics selected ASEAN countries, 2020 costs since 2011 (Logistics costs per GDP) 30.00% 26.43% 40.00% 25.00% 22% 35.00% 20% 30.00% 20.00% 25.00% 2.40% 14.10% 13% 20.00% 15.00% 15.00% 13.07% 10.00% 8.50% 10.00% 5.00% 10.95% 5.00% 0.00% 0.00% Administation Inventory carrying Transport and Warehousing Source: Banomyong and Varadejsatitwong, forthcoming. Sources: https://www.3plogistics.com/3pl-market-info-resources/3pl- market-information/global-3pl-market-size-estimates; NESDC 2021; and Banomyong and Varadejsatitwong, forthcoming. interest rates, higher inventory, and limited inventory management capabilities. Transport costs and warehousing costs in Cambodia are also 3.25 percent higher than in Thailand. Since 2015, logistics costs per GDP in Cambodia - estimated at 27,913 billion riels in 2021 (about US$6.7 billion)- fell to about 26 percent of GDP in 2020. As expected, the ratio of logistics costs to GDP in Cambodia increased between 2019 and 2020: logistics expenditures increased while GDP growth slowed in the wake of the COVID-19 pandemic (Figure S.24). Except for 2014 and 2018, when the logistics cost growth rate was higher than the GDP growth rate, the average logistics cost growth rate was less than the GDP growth rate. The GDP growth rate in 2020 was less than the logistics cost growth rate. In 2020, inventory carrying costs became the largest component of logistics costs, beyond transportation and warehousing costs. Inventory carrying costs accounted for 49.47 percent of total logistics costs, followed by transportation costs, representing 41.44 percent of the total logistics cost, while logistics administration costs remained unchanged at 9.09 percent. This may be an effect of the pandemic on inventory levels, as sales of goods were slower and supply chains suffered from limited delivery capability during lockdowns. Box S.1 explains the importance of estimating national logistics costs per GDP. 43This is the first time that these numbers have been calculated in the country. The methodology (as described in Annex S.1) is suggested to be adopted by the Ministry of Economy and Finance in their efforts to estimate national logistics expenditure. 43 CAMBODIA ECONOMIC UPDATE JUNE 2022 Box S.1. The importance of estimating national logistics costs per GDP Logistics at the national level has gained much attention from many countries, and at the global level, there already exist a number of global logistics-related indicators developed by institutions such as the World Economic Forum and the World Bank to broadly measure logistics quality and performance across the board. These macro-level indicators can capture logistics performance and reflect logistics improvements, and can be used as a benchmark for national competitiveness.a However, national logistics efficiency can also be evaluated in terms of trade-offs between a country’s economic output, that is, gross domestic product (GDP), and its national logistics cost (NLC), to reflect national competitiveness.b Calculating NLC is a complex process, as country-level and firm-level logistics activities are complex and different.c From the perspective of policymakers, governments may not be able to deal with such challenges related to national logistics performance if they do not have the ability to measure their respective domestic logistics performance and cost.d The ratio of logistics costs to GDP has been identified as a key indicator in measuring a country’s capability in terms of managing its logistics system.e This indicator has been widely adopted by many countries to reflect their logistics capability. The Ministry of Economy and Finance of Cambodia has recognized the importance for Cambodia to have such an indicator to assess the country’s overall logistics capability. Several countries have published their NLC as a percentage of GDP (NLC/GDP), but the method behind these calculations varies.f Different countries also use different data sources and calculation approaches. Comparing the ratio of NLC/GDP among countries is challenging due to the differing methodologies. Nonetheless, it is important to have baseline data for reference purposes as logistics development policies require in-depth data. Cambodia has never published national logistics cost per GDP, but some data exist related to logistics costs over sales in certain sectors. The challenge is that these numbers are sector specific, so they do not reflect the overall situation within the country. Sources: Banomyong and Varadejsatitwong, forthcoming. a. Havenga 2018. b. Rantasila and Ojala 2012; Havenga 2018. c. Wajszczuk 2005; Pishvaee et al. 2009. d. Havenga 2010. e. Banomyong et al. 2021. f. Rantasila and Ojala 2012. The reduction in transportation and warehousing cost, representing up to 10 percent of GDP, is derived from the overall freight volume contraction as a result of the COVID-19 pandemic (Figure S.25). They are, however, substantially higher when compared to Thailand, for example. Warehouses, ranging from less than 1,000 square meters to over 1,000 square meters (considered to be large) tend to be concentrated in the vicinity of Phnom Penh and National Roads No. 3 and No. 4. While some modern warehouses have been built in recent years, 44 mostly by foreign-invested logistics companies, the capability of older facilities remains limited, as there has been no standard developed for either warehouse facilities or the services they offer 45. The high transportation costs might be attributed to the fact that trucks in Cambodia are older, and the recent increases in energy costs have a direct effect on increasing transportation costs. 44 COVID-19 vaccination campaigns enabled a positive outlook for the warehouse and storage subsector, and rental prices and demand for warehouse space in Cambodia appeared stable over 2020‒2021. Average monthly rent for warehouse space in Phnom Penh is estimated at between US$2 to US$5 per square meter, contingent on the location and condition of the facilities, while leasing contracts are averaged at five years (Banomyong and Varadejsatitwong, forthcoming). 45Japan’s retail giant Aeon has plans to build a 30,000 square-meter logistics hub in a special economic zone near the port of Sihanoukville, featuring Cambodia’s first bonded warehouse and offering services ranging from import storage to customs clearance and customer support. 44 CAMBODIA ECONOMIC UPDATE JUNE 2022 Figure S.25. Cambodia’s logistics costs and Figure S.26. Cambodia – logistics cost structure GDP growth rate at current prices (Percentage) 40.00% 33.97% 30.00% 20.00% 9.92% 11.98% 10.00% 4.97% 3.19% -… 2.71% 0.00% -0.65% 2012 2013 2014 2015 2016 2017 2018 2019 2020 -10.00% -13.28% -20.00% Logistics Cost Growth Rate GDP Growth Rate Source: Banomyong and Varadejsatitwong, forthcoming. Source: Banomyong and Varadejsatitwong, forthcoming. The total cost of holding inventory (inventory carrying cost) is particularly high in Cambodia, implying high uncertainty in the supply chain. Specifically, firms in Cambodia have higher expenses arising from keeping products shelved at a warehouse, distribution center, or storage facility, resulting in actual expenditures related to storage, labor, transportation, handling, insurance, tax, item replacement, shrinkage, and depreciation, not to mention opportunity costs, which will have an additional impact on firm profitability (Figure S.26). The estimated value of the inventory carrying cost in Cambodia is equivalent to about 13 percent of GDP. Inventory carrying costs are highly related to growth (or slowdown) of household consumption, and to interest rates. With the drop in household consumption in 2020 (almost 2 percent 46), levels of inventories held in the manufacturing sector increased to an estimated 2.3 percent. Furthermore, the direct relationship between the inventory carrying cost and interest rate levels, with an average loan rate in 2020 of 9.88 percent, was slightly higher than in 2019. While logistics administration costs are not available in the Cambodian national accounts, the related expenditures are imputed and estimated to be around 10 percent of total logistics cost (2,537,530.02 million riels), equivalent to 2.4 percent of GDP (Figure S.27 and 28). Figure S.27. Cambodia – changes in inventory Figure S.28. Cambodia – logistics administration and household spending costs (Million riels) Source: Banomyong and Varadejsatitwong, forthcoming. Source: Banomyong and Varadejsatitwong, forthcoming. 46 ADB 2021. 45 CAMBODIA ECONOMIC UPDATE JUNE 2022 Drivers of High Costs and Low Reliability As presented, transportation costs are particularly high, representing almost 10 percent of logistics costs (alongside warehousing), pointing to significant inefficiencies in the sector. Current trucking services are largely low cost and low quality and are often provided by the informal sector. Such services are unlikely to sustain the growth and development of an increasingly complex, externally oriented manufacturing sector operating at international standards, competing in international markets, and required to meet international delivery times and reliability. A comprehensive trucking sector will normally attempt to accommodate changing customer requirements and preferences, but such adaption can be greatly facilitated by the appropriate policy framework and enabling highway infrastructure. Local trucking operators do not generally work directly for any of the global shippers. They are too small and do not have Figure S.29. Import of trucks and tractor (head) units Table S.1. Import duties and fees for trucks into Cambodia, and revenue collection, billion of riels, 2017–19 No. Tax Rate (%) 600 20,000 Billions 500 Customs 1 15 15,000 duty 400 300 10,000 2 Special tax 10 20 30 40 200 5,000 3 VAT 10 100 - - Cumulative 39.2 51.8 64.5 77.1 2017 2018 2019 2020 2021 total New Units (RHS) Used Units (RHS) Revenue - New Revenue - Used Source: Customs Data, Cambodia GDCE. Source: Customs Data, Cambodia GDCE. Note: RHS = right-hand scale. the customer service, reporting systems, insurance, or payment terms that the global brands need. Therefore, the local operators work with the global freight brands that have been allocated the routes from that country or region. Transport operating costs are currently under severe upward pressure due to the high price of diesel, exacerbated by the characteristics of the operators’ fleet. Many trucks operating container drayage date back to the last century, as Cambodia has one of the oldest trucking fleets in Asia, and many of the trucks are imported second hand from the Republic of Korea, third hand from Vietnam or other countries where they are long past their useful and economic life. Poor maintenance is made worse by the facilitation culture, which enables operators to get around inspections and roadworthiness checks by making “informal” payments. Upgrading the goods vehicle fleet should be seen as a priority from both a logistics cost perspective and an environmental perspective, as there is an urgent need to burn less and cleaner fuel of a higher grade than at present. There are currently no incentives for trucking operators to invest in newer equipment. According to interviews undertaken as part of this work, operators point to low freight rates and high import duties and taxes for new trucks (figure S.29). The import duties and fees for trucks, which includes the customs, special tax, and value-added tax in Cambodia, ranges from 35 percent to 65 percent, (Table S.1) which is far higher than in neighboring countries, where it can be as low as 1.5 percent. Combined with relatively high interest rates, operators are borrowing money to pay the duty rather than buying newer, cleaner trucks that burn far less fuel. The fuel consumption of new tractor units ranges from 3.2 to 3.5 kilometers per liter for a 400-horsepower tractor. This compares to 2.5 kilometers per liter for a 10-year-old tractor dropping to around 2.2 kilometers per liter for a 20-year-old tractor. This is a saving of 30 to 40 percent on fuel in addition to the benefits of reduced emissions (Table S.2). Since Cambodia imports all its fuel, savings also have effects on the country’s balance of payments. 46 CAMBODIA ECONOMIC UPDATE JUNE 2022 Table S.2. Fuel consumption of tractor units Age Capacity Annual ton Fuel burned Fuel Fuel Horse- ton km per truck in 50,000 km burned burned power km/litre ton/km 15 12-wheeler 15 750,000 25,000 2 0.033 320 10 12-wheeler 15 750,000 22,727 2.2 0.030 360 20 Semi-trailer 20 1,000,000 22.727 2.2 0.022 360 22 wheels 10 Semi-trailer 20 1.000,000 20,000 2.5 0.20 360 22wheels 0 Semi-trailer 20 1,000,000 15625 3.2 0.016 400 22 wheels 0 Semi-trailer 25 1,250,000 16,666 3.0 0.013 420 0 Semi-trailer 30 1,500,000 20000 2.5 0.013 420 Source: GIZ 2018. The relatively short contraction in trade experienced in Cambodia seems to have had some impact Table S.3. Freight rates (road and rail) along selected origin-destination, cost/km, 2021 Origin-destination Mode Distance Average 20-foot 40-foot Cost/km (km) time container container (TEU) (hours) (TEU) (FEU) Phnom Penh – Road 230 7 US$218 US$253 US$0.95 Sihanoukville Rail 264 10 US$136 US$157 US$0.59 Phnom Penh – Road 348 10 US$556 US$686 Poi Pet US$1.60 Phnom Penh – Road 178 5 US$321 US$371 Bavet US$1.80 Phnom Penh – Road 124 6 US$304 US$349 Prey Vor US$2.45 Source: Ministry of Public Works and Transport 2021. Note: FEU = forty-foot equivalent unit; km = kilometer; TEU = twenty-foot equivalent unit. on trucking costs, which are very high on selected routes. According to focus group discussions undertaken as part of this special report, revenue (for the trucking company) for moving a 40-foot container from Phnom Penh to Sihanoukville Port has dropped from US$250/US$270 to US$170/US$180. Shippers, however, noted that trucking costs charges remained at US$270/US$300 for a 40-foot container on the same route (Table S.3). It appears that intermediaries arranging the service have not passed down the extra savings. A similar phenomenon has been pointed out by work done by the Ministry of Public Works and Transport as part of the “Interim Master Plan on Intermodal Transport Connectivity and Logistics System,” which collected freight rates by transportation route. Accordingly, the freight rates charged by trucking companies depend on the route. It appears that the Royal Railway Northern Line would be a suitable alternative to the currently high freight rates charged by trucking for this segment, subject to capacity and reliability. The geographical configuration of trade flows and freight demand (medium distance concentrated on a few origin/destination points) should mean that rail has the potential to be an important player in the freight market, which is largely ceded to road transport. Investments are required, mainly in equipment. Investments will, however, have a limited impact unless an underlying business and management environment with operating priorities is developed. If Royal Railways is to compete effectively and the railways to regain its role as one of the transport modes for freight, substantial changes will be required in its governance, finances, and operation management and priorities. With PPAP’s increasing demand, a rail connection to the PPAP container terminal might be considered. The costs of crossing borders are high, including customs fees, immigration, and other costs not related to transport costs and bilateral agreements yet to be implemented, according to the Interim Master Plan on Intermodal Transport Connectivity and Logistics System. While the actual costs vary for 47 CAMBODIA ECONOMIC UPDATE JUNE 2022 different border crossings, the average cost for Bavet Border Crossing is estimated at US$410 per container (general cargo, 40 feet), US$307 per container at Prey Vor Border, and US$311 per container at Poi Pet Border. The costs for a 40-foot container crossing the border at Bavet (garments) is US$248, at Prey Vor Border it is US$217, and at Poi Pet Border it is US$337. In addition, the cost of one 20-foot container is US$225 at Bavet Border, US$188 at Prey Vor Border, and US$255 at Poi Pet Border. 47 The lack of implementation of the Greater Mekong Subregion Cross-border Transport Agreement for the past five years, including bilateral agreements with Thailand and Vietnam, is leaving Cambodia behind in taking on a significant share of the cross-border trade with its neighbors. Earlier reports also described the high cost of port services and terminal handling charges in Cambodia compared to Vietnam and Thailand. The reports noted that “the provision of important maritime auxiliary services is currently monopolized by state-owned enterprises, leaving a large gap for competition to improve services’ quality and delivery.” 48 According to the OECD Investment Policy Review (2018), “a recent cost benchmarking exercise carried out by members of EuroCham Cambodia (2016) suggest that port dues and charges relating to comparable vessels are 3.7 times higher at Sihanoukville than at Cai Mep, Viet Nam.” 49 According to discussions with export associations, terminal handling charges were about US$1,000 for a 40-foot container before the COVID-19 pandemic hit, while the charges have increased to about US$1,200 (free on board, FOB). 50 This is double the charges levied by other ports in the region, such as Bangkok or Cai Mep. A similar situation is reported with respect to the normal clearance price for an export container, which is reported to be around US$220 to US$250, including a significant profit (more than 100 percent) by the clearing agent/broker. Customs clearance costs are about US$50 in Japan and US$60 in Thailand and Vietnam. Improvements in SAP’s efficiency can, however, be observed, but standards are not at levels comparable to ports in the region. Measured as the length of port stay, a general reduction in the average number of days a containership is spending in SAP can be observed: from an average of 1.36 days in 2019 to less than a full day in 2020, followed by a slight increase of up to 1.13 days in 2021, mostly attributed to the pandemic’s effects resulting in smaller containerships’ port stay. The reduction of port time is observed in feeders’ data, from an average of 26 hours in 2019 down to 19 hours in 2021. In the same fashion, the average time in port of feedermax ships has dropped from 49 hours in 2019 to 40 hours in 2021; small feeders tend to spend less time at port facilities, as well, from 30 hours average during the pre-pandemic year down to slightly over 21 hours in 2021 (Figure S.30). 47 Ministry of Public Works and Transport 2021. 48 World Bank 2018, p. 48. 49 OECD 2018. 50 The normal terms of trade are FOB Sihanoukville. This means that the FOB costs are paid by the shipper, which means that the shipper is generally free to shop around and choose whom they want. However, this is usually not the case in Cambodia, where the agent handling the FOBs is often buyer nominated. This means that the shipper will have to use the one the buyer wants the shipper to use. 48 CAMBODIA ECONOMIC UPDATE JUNE 2022 PPAP and SAP recorded substantial revenues and profits in 2021. Competition between PPAP and SAP should improve efficiency. In 2021, PPAP and PAS collected US$33.7 million in revenues (up by about 20 percent from 2018, at US$20.722 million) and US$83.11 million (compared to US$82.22 million in 2018), respectively (Figure S.31). Lift-on-lift-off charges and stevedoring revenue seem to account for Figure S.30. Average time spent at Sihanoukville Figure S.31. Phnom Penh Port Authority, revenue Port, 2019–April 2022 structure, 2020–2021 50 1.4 100% 45 90% 1.2 40 80% 35 1.0 70% 30 60% 0.8 Hours 50% Days 25 0.6 40% 20 30% 15 0.4 20% 10 0.2 10% 5 0% 0 0.0 2020 2021 2019 2020 2021 2022 Stevedoring LOLO charge Port dues & charges Other FEEDER FEEDERMAX SMALL FEEDER AVERAGE OVERALL Source: MPWT 2022. Source: Marine Traffic data and measurements of ports arrivals and Note: Lift-on/lift-off. departures. Note: Small feeder (up to 1,000 TEUs), feeder (around 2,000 TEUs), feedermax (around 3,000 TEUs). over 70 percent of total revenue of each port. Being port authority and operator at the same time, both ports are listed on the Cambodian Securities Exchange (since 2015), with majority shares (75 to 80 percent) owned by the Ministry of Economy and Finance. Similar to other countries, informal payments to speed up processes or evade standards, procedures, and rules all together are also prevalent in Cambodia. For many years, transport companies and logistics operators have charged over the odds – that is, more than the usual or expected amount – in Cambodia to cover unforeseen costs. They included unofficial payments to get documents out in time for shipment, to get stamps before the office closed, and to move trucks in transit to or from the ports and borders. They were known as just-in-case (JIC) and have been accepted as part of the cost of moving export, import, and transit goods through and out of or into the country. While business was in ascendency and it was a sellers’ market, buyers were prepared to pay, as they had no easy way of dealing with the local service providers unless they set up an office in Cambodia. This situation is not unique to Cambodia, although it is more prevalent than in most other exporting countries. The requirements of the U.S. Corrupt Practices Act and similar laws in other countries mean that global buyers and logistics brands want to distance themselves from being involved in paying for facilitation, so, they employ others that will do it and invoice it as handling or processing fees. These charges are not queried and are referred to as “the cost of doing business in Cambodia.” While shipping lines are characterized by a service model with a relatively high level of predictability, SAP and PPAP experience a concentration of registration of customs declarations on Fridays, most likely related to meeting cutoff times for shipping schedules, with cascading effects. A large volume of exported goods is registered in exit offices on Fridays, creating significant congestion in already crowded urban environments, such as Phnom Penh and Sihanoukville (Figures S.32 and S.33). It is a testament to “the way logistics operators are doing business in Cambodia.” Such patterns of increased concentrated demand are yet to be integrated into central and urban planning initiatives for major cities in Cambodia to regulate and/or accommodate freight movements, in particular, trucking. At present, several restrictions are in place on access of heavy goods vehicles in urban areas, such as bans and curfews. The result may be that the same amount of cargo will be delivered by many smaller vehicles, creating unprecedented congestion. 49 CAMBODIA ECONOMIC UPDATE JUNE 2022 Figure S.32. Registration of exported goods, distribution across weekdays, volume, 2018–2021 Figure S.33. Sihanoukville Port CEB, registration of exported goods, daily distribution, value, 2021 Source: Customs Data, Cambodia GDCE. Raising service level and standards as well as improving the quality of the regulatory framework is at the core of the government’s reform agenda; while service level and standards are generally driven by the private sector, especially as per global customers’ requirements. A Best Trader Program has been introduced for selected traders who are exempt from having to advance verification of customs valuation procedure and rule of origin at headquarters, are trusted to have the correct documentation, and are not inspected or stopped as others. While initially focused on traders involved in import-export operation, the program has great potential for the logistics sector as it can help raise transport and logistics standards 50 CAMBODIA ECONOMIC UPDATE JUNE 2022 alongside other measures. Currently, 46 companies are participating in the scheme, 51 and there are plans to roll it out to other participants of the international trading sector, including to customs brokers and logistics companies. It is seen as a step toward an Authorized Economic Operator (AEO) program. Customs reported that the program was working well, that there was less checking, and the compliance of documents was greater. This is a breakthrough that could have far-reaching benefits in terms of raising professional standards, as well as offering a pathway toward an AEO system. Most customs programs are built on AEO responsibility, including for ASEAN and the ASEAN Customs Transit System (ACTS). There are plans to expand the qualification criteria and include customs brokers 52 and transport and logistics operators. To improve regulatory compliance and increase automatization of the process through information and communications technology (ICT), Cambodia has initiated reforms in logistics to reduce administrative burden, lower compliance costs, and simplify procedures. Some of the logistics-related licenses can be applied for online in Cambodia; for example, road freight operators can apply for their license and certificate of business registration on the Ministry of Public Works and Transport website. However, not all licenses and accreditations necessary for logistics providers can be applied for online, as certain authorizations require applicants to submit hard-copy applications with the relevant agency. Applicants for international express mail service licenses, for example, must submit a hard-copy application to the Ministry of Posts and Telecommunications. 53 Not only does the handling of hard copies slow the processing of applications, but it also increases the likelihood of irregularities. Shortcomings in regulatory quality are frequent, and the most up-to-date rules and regulations are not always accessible. 54 There is no lack of ICT systems under development or developed, especially in port or customs clearance, but connections among the different systems are far from complete (Figure S.34) and inter-ministerial coordination yet to be fully exploited. Figure S.34. Regulatory quality in Cambodia and selected countries, 2010‒2020 3 2 1 0 -1 -2 2010 2015 2020 Source: World Bank’s Worldwide Governance Indicators, http://info.worldbank.org/governance/wgi. Note: Lowest: -2.5; Highest: 2.5; The regulatory quality estimate indicator captures the perception of a government’s ability to formulate and implement sound policies and regulations that permit and promote private sector development. In the wake of the COVID-19 pandemic, assessment of customs declarations and supporting documents for import and export through the treatment channel “green lane” has been almost entirely phased out, with lasting impact (Figure S.35). In terms of imports (in both value and volume terms), the green lane accounted for a minor part of trade before the start of the COVID-19 pandemic and To participate, approval by the GDCE is required, as is a US$250,000 register capital and annual turnover of US$2 51 million, which excludes many small and medium-sized enterprise operators. 52While customs brokers must be licensed, the training takes only one month and is done by Customs to ensure that the broker knows the clearance process and what is required. In other countries, a customs accreditation course is part of a wider licensing process that can take up to two years. This includes comprehensive training on Harmonized System (HS) codes and international commercial terms (Incoterms, which are a set of 11 internationally recognized rules that define the responsibilities of sellers and buyers), to fully understand how customs codes are used and how the terms of trade affect the value of the cargo. 53OECD 2022. 54A good example of a compilation of all laws and regulations related to the maritime and ports sectors in Cambodia was prepared with support from the Japan International Cooperation Agency (JICA); see https://openjicareport.jica.go.jp/pdf/11861986_01.pdf. 51 CAMBODIA ECONOMIC UPDATE JUNE 2022 was phased out completely in March 2020. The use of the yellow lane, which requires physical verification by a customs officer of the information provided online against a hard copy (to be provided by the customs broker or declarant in person) before rerouting to the green lane, decreased. Until the end of 2021, the blue lane, and to a much lesser extent, the red lane, (mostly for minerals and precious metals) treatment prevails, which requires specific recommendation for a post-clearance audit or are subject to physical inspections. This trend may need to be reversed as the pandemic subsides. The trend is similar for exports, although exports processed through the green lane previously accounted for a larger share (almost one-fifth), which has largely been transferred to the blue lane (notably for textile, clothing, and footwear goods). According to a recent assessment done by the World Bank, post-audit productivity as required under the “blue lane” is very low when measured in terms of detection (0.01 percent). Figure S.35. Export and import customs clearance – lane treatment, volume, and value, quarterly, 2018– 2021 Source: Customs Data, Cambodia GDCE. Source: Customs Data, Cambodia GDCE. Note: : (1) Green lane – SAD is automatically assessed and an assessment notice is used, (2) Blue lane – the SAD is provided the same treatment as the green lane but with specific recommendation to conduct a post-clearance audit, (3) Yellow lane – the SAD must be checked against the submitted documents before rerouting to the green lane, and (4) Red lane – the SAD must be checked against submitted documents and the goods are subject to physical inspection before rerouting the SAD to the green lane (https://cambodiantr.gov.kh/index.php?r=searchProcedure/view1&id=61) Simplified clearance and fast turnaround are particularly important for agricultural products and e-commerce, the former lacking cost-effective cold chain solutions to urban centers within Cambodia and to neighboring countries. Cambodian exporters of fruits and vegetables require guaranteed cold chains to be able to ship their products out of Cambodia by air or road. Meanwhile, fruits and vegetables sold in rural areas seem to originate to a large extent from Thailand and Vietnam. The issue for small producers is achieving economy of scale in transport so that their costs are kilo based, which means filling large trucks and reducing waste, which can run up to 30 percent, if there are no suitable cold chains. Adding value at origin also requires cold chain protection, as produce has a short life. Given existing constraints to selling these products in the local market, initiatives are needed to integrate “first mile” from farm gate to collection, consolidation, and packaging to enable rural producers to get their products to market with minimal losses as part of an import substitution scheme before expanding to links with neighboring countries. The lack of simplified clearance procedures for low-value shipments is not conducive to the promotion of cross-border e-commerce. Particularly, this restricts economic participation of micro, small and medium-sized enterprises. The administrative cost related to collecting relatively small amounts of duties and taxes generally outweighs the actual revenues collected. The World Trade Organization, 52 CAMBODIA ECONOMIC UPDATE JUNE 2022 International Chamber of Commerce, and Asia-Pacific Economic Cooperation generally recommend a higher de minimis value threshold, which is currently set at US$50 in Cambodia. The country also lacks an express clearance model. There are several initiatives and proposals, including from DHL and the European Chamber of Commerce (since 2019) on raising the de minimis threshold and introducing simplified clearance for low-value shipments. The proposals seem to follow the guidelines agreed between the World Customs Organization and the Global Express Association. While work is ongoing in several related areas 55, GDCE is currently preparing draft procedures for express assignments (expected to be consulted with relevant stakeholders), which are yet to be implemented. RECOMMENDATIONS In some areas of logistics in Cambodia, change is already taking place, and the momentum of change needs to be maintained and possibly increased and extended to cover all links of the supply chain to improve reliability and reduce logistics costs. In other areas, the Government of Cambodia has announced its intentions to introduce major changes but has yet to implement them 56. There are also aspects where changes have yet to be agreed, let alone implemented. Efforts to increase Cambodia’s competitiveness, facilitate international trade, and enhance its connectivity to better serve consumers and meet the needs of regionally integrated facilities for reliable delivery of inputs and outputs require a systematic approach. The effectiveness and sustainability of the reform agenda to improve Cambodia’s trade competitiveness largely depends on strong leadership by the government and positive outcomes. While the establishment of performance indicators to monitor and measure the progress in the work program (ideally to be endorsed bi-yearly) is critical to provide the basis for continuing support by the government and international development partners, a lead “agency” in the government with clear mandate and terms of reference at the national and border/gateway level must be identified. Given that logistics and supply chain connectivity spans over several technical ministries and agencies with different responsibilities and facilitation/ control functions, it would be advisable to identify an institutional arrangement that would be most suitable and inclusive to advance the reform agenda and implement agreed measures. At the national level, the experience of other countries shows that the lead “agency” is often headed by a high- level government official (e.g., President or Prime Minister/ Deputy Prime Minister) supported by a Secretariat and representatives from all responsible ministries/ agencies. At the border/gateway level, a lead agency as “gatekeeper” with responsibility to coordinate between the different technical agencies represented at the border/gateway should also be assigned. In most countries in the world, customs authorities often take the coordination role at major gateways/ border crossings given their dual function of control and facilitation 57. 55 The Deutsche Gesellschaft fuer Internationale Zusammenarbeit (GIZ) is providing support to GDCE through its ARISE Plus program to implement projects on digitalizing global maritime trade (DGMT) and digitalizing global trade (DGT) for pre-arrival processing, including a review of workflow and gap analysis of the legal framework and IT infrastructure. 56 Since 2015, with the adoption of the Cambodia Industrial Development Plan 2015‒2025, the government identified the improvement of logistics and supply chain connectivity as essential to the country’s economic growth. In October 2016, the General Department of Logistics was established within the Ministry of Public Works and Transport. In recognizing the necessity of the logistics sector, the National Logistics Council and the National Logistics Steering Committee were also established by Royal Decree in November 2017. The “Interim Master Plan on Intermodal Transport Connectivity and Logistics System” was completed and approved by the National Logistics Council in January 2020 to promote the implementation of relevant essential projects for the short, medium, and long term. 57 A similar measure was introduced in “The Strategic Framework and Programs for Economic Recovery in the Context of Living with the COVID-19 in a New Normal 2021-2023” adopted in December 2021 concerning the amendment of Sub decree 64 on “Determining and Operating of Checkpoints at International Gates, International Border, Bilateral International Gates, Border Area and Seaport Throughout the Kingdom of Cambodia”. 53 CAMBODIA ECONOMIC UPDATE JUNE 2022 Reform efforts must look beyond improvements of physical assets toward strengthening the entire supply chain, incorporating the following elements: In the short term: 1. Monitor efficiency of main trade gateways with regular progress updates The importance of the gateway ports for the competitiveness of Cambodia’s trade and further global value chain integration cannot be overstated. Cambodia’s main exports are trading in an increasingly competitive market, and the government needs to ensure that its main trade gateways fully support its external trade position with the highest efficiency at the lowest cost. The basic decision to make the port authorities landlords rather than service operators has already been taken. But a review of the reportedly high costs is needed. The government also needs to assess whether financial transfers from users to the ports are in the best interest of development, or whether lower charges and lower port profits would have a more positive impact on trade and development. Effective implementation also includes updates on progress of performance indicators to the government which should be done on a regular basis, at least quarterly. The coverage of the monitoring system could also be extended at a later stage to include trade routes and corridors, e.g., for exports from clearance at factory to exit gateway. Establish a comprehensive monitoring system with regular updates to assess the performance of the ports and benchmark them against similar ports in neighboring countries. Indicators could include operational efficiency, financial performance, dwell time, charges, and handling fees. Responsible agency: Ministry of Economy and Finance (MEF) (GDCE) (with assistance of DPs and logistics industry specialists) Ministry oversight/lead: MEF. 2. Expand the “Best Trader scheme” to the wider logistics sector Creating the right incentive schemes for upgrading standards in the logistics profession is paramount. While there are plans to expand the Best Trader scheme to include customs brokers, forwarding agents, carriers, and shipping lines, there seems to be no mechanism for qualification. The international standard would be to have licensed persons in place as part of the qualification process. This is already covered under Annex 9 of the Greater Mekong Subregion Cross Border Transport Agreement, to which Cambodia is a signatory. Therefore, there is already a provision on the criteria for licensed persons and guidance on good standing in existing regulations that could be implemented or expanded as necessary to support the extension of the Best Trader program to the logistics sector. For example, formal registration and the use of newer trucks could be used as incentives and criteria for a “Best Trucker” scheme. Prioritize the expansion of the Best Trader scheme in the logistics sector and ensure implementation to include trucking companies (Best Trucker) and customs clearance agents (Best Clearance), which is expected to be a major step toward the professionalism needed in the sector. Responsible agency: MEF ,GDCE) (with assistance of DPs and logistics industry specialists), MPWT Ministry oversight/lead: MEF. 3. Institutionalize “ROADWATCH,” supported by a hotline for traders and citizens to report irregularities (if it is not in place yet) Opaque enforcement and implementation of relevant rules and regulations (including traffic laws, drug and illegal firearm inspections, sanitary and phytosanitary inspections, customs inspections) and informal payments to circumvent or speed up inspections undermine the perception about regulatory quality and 54 CAMBODIA ECONOMIC UPDATE JUNE 2022 rule of law. This is particularly relevant for import-export businesses and related logistics as they can be confronted with many agencies across several sectors. Establish a team led by a top-ranking official, comprising competent officials from the Ministry of Public Works and Transport (MPWT), Ministry of Interior (MoI), Ministry of Economy and Finance (MEF), General Department of Customs and Excise of Cambodia (GDCE), and local authorities dedicated to facilitating trade with hotline support, enforcing the famous catchword “ROADWATCH” on facilitation of road transport (earlier introduced by the government). Responsible agencies: MEF, MoI, MPWT, Ministry of Commerce (MoC), Ministry of Justice (MoJ) (in consultation with the private sector) Ministry oversight/lead: MEF. 4. Assign a review team and confirm a business plan for railways The quality of its mainline infrastructure and the geographical configuration should mean that rail has the potential to become an important player in the freight market, which it has largely ceded to road transport. Some investments are required, most likely in equipment, beyond the second-hand locomotives and rolling stock sources from as far afield as South Africa. The business plan should also include the underlying business and management environment within the railway sector, including priorities on linking the network with neighboring countries and main gateway ports in Cambodia and abroad. Develop a reform and business plan for the railway sector with a 10-year time horizon, jointly led by the MEF and MPWT in consultation with the private sector to ensure that railways meet customer demands for efficient and reliable service. Responsible agency: MPWT (with assistance of DPs and in consultation with the private sector) Ministry oversight/lead: MEF. 5. Promote automation, improve transparency, and eliminate human interaction in the customs clearance process The customs clearance process remains to be heavily reliant on human interactions and paper-based transactions. IT tools, such as ASYCUDA could be further used in the decision-making process. At present, once information is registered electronically in ASYCUDA, the customs broker/declarant is required to print and sign two copies of the Single Administrative Document and deliver hard copies of all documents for further processing. Accordingly, a customs officer “face-vets” that the hard copy is properly filled, and is in clear language, is readable, and is signed by the respective customs broker/declarant. Subsequently, the customs officer relies on ASYCUDA to assign the predetermined risk management category. To increase automation and use of digital signatures, the new Law on E-commerce has already enabled the use of digital signatures. At the same time, reinstating the green lane and reviewing productivity of post audits is of paramount importance. Promote automation, improve transparency and eliminate human interaction in the customs clearance process (as much as possible) by streamlining existing processes, removing “face-vetting”, accepting digital signatures and using full automation of risk- based system to assign lanes (green/blue/yellow/red). Responsible agency: MEF (GDCE) (with assistance of DPs and logistics industry specialists) Ministry oversight/lead: MEF. 6. Further rationalize duty and special tax on new truck imports 55 CAMBODIA ECONOMIC UPDATE JUNE 2022 Current trucking services in Cambodia are largely low cost and low quality, and often provided by the informal sector. Such services are unlikely to sustain the growth and development of an increasingly complex export-oriented manufacturing sector operating at international standards, competing in competitive markets, and required to meet international delivery times and reliability. Policies are required to encourage the growth of a modern trucking sector, enhance service speed and delivery, and reduce the high external costs of the present trucking sector. This could build on the “tax policy on eco-friendly vehicles” which is under preparation by the MEF. Further rationalize truck import tariffs to encourage the re-equipping of the fleet with larger, modern vehicles appropriate to providing a high level of service. This could be accompanied by a vehicle scrapping program. Responsible agency: MPWT (with assistance of DPs and logistics industry specialists) Ministry oversight/lead: MEF. In the medium-to-longer term: 1. Facilitate transit of goods According to UN Comtrade data, trade between Thailand and Vietnam has grown rapidly. Thailand’s imports from Vietnam rose from US$1.3 billion in 2010 to US$7.0 billion in 2021, while Thai exports to Vietnam increased from US$5.8 billion to US$12.3 billion. International transit trade through Cambodia continues to remain small, totaling 102,000 tons in 2021. This transit volume captures less than 5 percent of trade between Thailand and Vietnam. While transit heavily depends on regional production network configuration, it would be advisable to introduce measures to make transit and border regulations more transparent, streamline administrative procedures, and further simplify border control and procedures. This also underscores the importance of regional and subregional collaborative efforts in developing efficient transit transport systems, 58,59 based on existing institutional frameworks (e.g., ASEAN, GMS CBTA). Further develop and implement reliable transit solutions, with bonded transport and guarantee systems to take advantage of goods in transit as regional supply chains develop. Responsible agency: MEF (GDCE) (with assistance of DPs and logistics industry specialists) Ministry oversight/lead: MEF. 2. Develop a ‘Comprehensive Master Plan on Multimodal Transportation and Logistics’ (2022-2030) A comprehensive Comprehensive Masterplan on Multimodal Transportation and Logistics is paramount to increase efficiencies for internal distribution and to strengthen cross-border transport collaboration, especially with neighboring countries Vietnam and Thailand. Heavy agricultural commodities are most suitable to be shifted by rail and river transport, which have not taken up their share. The target should include but be linked to, among others, (i) the development of the Business Plan for Railways Development, and (ii) a plan to further develop river transport with links to existing port infrastructure. Finalize the Comprehensive Masterplan on Multimodal Transportation and Logistics (2022-2030) with sequencing and prioritization, with a focus on smart logistics solutions land oversight and strengthening cross-border transport collaboration with Vietnam and Thailand, with a vision for modal development. Responsible agency: MEF/MPWT (with assistance of DPs and logistics industry specialists) 58 World Bank 2012, 2018. 59 A 2008 World Bank study found that the average transit time of wheat from its main source markets to its target markets in Arab countries was 78 days, and the trip costs about US$40 per metric ton. By contrast, the average transit time to target markets in the Netherlands was just 18 days, and the trip costs US$11 per metric ton. (In the Republic of Korea, the average transit time was 47 days, and the trip costs US$17 per metric ton.) 56 CAMBODIA ECONOMIC UPDATE JUNE 2022 Ministry oversight/lead: MEF. 3. Champion Urban Logistics Initiative and Planning Sprawling urban centers such as Phnom Penh and Sihanoukville are creating issues for transport planning and logistics. Traffic concentration due to the rush of operators to not miss the ship are also contributing to additional stress to urban centers. The ongoing preparation of the Sihanoukville masterplan is a step in the right direction. Transport services such as trucking are prohibited from entering urban centers during working hours, creating delays and congestion. Linking logistics and transport planning in urban development plans, especially first- and last-mile delivery, will help prepare the country’s logistics and connectivity, as by 2030, it is expected that Cambodian firms will move four times more goods through highways, ports, airports, and warehouses. 60 Introduce incentives and measures to take into account commercial freight movements in urban development plans under a public-private dialogue platform. Responsible agency: MEF/MPWT/Ministry of Land Management Urban Planning and Construction (MLMUPC) (with assistance of DPs and logistics industry specialists) Ministry oversight/lead: MEF. 4. Promote specialized logistics and e-commerce E-commerce is rapidly growing, supporting the domestic micro, small and medium-sized enterprise (MSME) sector, which boosts job creation and growth. E-commerce potentially helps the MSME sector to export and integrate in regional supply chains. Developing specialized logistics and e- commerce is an important prerequisite, as is promoting retail businesses to invest in distribution centers and warehouses to cope with the growing demand for small-scale and specialized delivery. In this regard, it is important to engage with the Global Express Association (GEA) and World Customs Organization (WCO) to adopt low-value express clearance best practice guidelines to enable clearance exemption for less than the de minimis threshold, and to adopt the GEA simplified clearance process presented by DHL. Develop and implement a plan with the aim to support small producers getting their produce into a cost-effective cold chain to urban centers, while attracting the private sector to develop a domestic distribution network for fresh produce. In this regard, it is necessary to review the de minimis threshold 61 for individuals and MSMEs aimed at boosting economic participation. Responsible agency: MEF (GDCE)/MoC/MAFF Ministry oversight/lead: MEF. 5. Ensure access to the most up-to-date logistics-related legislation Making legislation accessible and organized in a user-friendly manner is a prerequisite for improving the quality of the regulatory framework. This will allow participants of the international trading system to have full transparency of rules and regulations applicable to them. The government should ensure that there is an up-to-date version of the primary and secondary legislation, including guidelines available on agencies’ websites and/or on the official legal database. Obsolete legislation should be marked as such. Publish all primary and secondary legislation in a single database. Alternatively, or until this is implemented, each public agency, authority, and/or ministry operating in the World Bank 2018. 60 61A valuation ceiling for imports below which no duty or tax is charged and the clearance procedures are minimal. This is US$300 in Singapore and US$200 in the Philippines. 57 CAMBODIA ECONOMIC UPDATE JUNE 2022 logistics sector should publish a complete list of legislation it administers on its website, along with its status. Responsible agency: MPWT Ministry oversight/lead: MPWT with support from the MEF. 6. Support real-time visibility and transparency of freight movements Visibility with the ability to track and trace freight movements will provide insights on how supply chains work. Accurate information is important to help address bottlenecks (especially in times of crisis) and determine their causes. Resilience – the ability to recover from unexpected shocks – requires visibility, agility, and redundancy. The movement of goods is almost entirely privately operated in Cambodia and spans shipping lines, ports, terminal operators, truckers, railways, warehouses, and cargo owners. While some of the actors have made strides in digitizing their own internal operation, they do not always exchange information with each other. An example of such initiative is the Freight Logistics Optimization Works (FLOW) initiative, recently launched by the U.S. government, with increased data sharing. Identify and operationalize a first information exchange that will support a more resilient and fluid supply chain in cooperation with a variety of stakeholders, including commitments by the government to support fluidity, especially linked with the monitoring of efficiency of global trade gateways, building on ongoing achievements. Responsible agency: MEF/MPWT (with assistance of DPs and logistics industry specialists) Ministry oversight/lead: MEF. Although major investment in Cambodia’s main logistics arteries is still required, much of the essential capital assets exist. Policy and institutional changes in the way that the logistics sector is organized and managed would result in substantial gains in productivity and cost reductions, and in establishing the basis for increased private sector investment. Introducing such changes may not be easy as some may be at variance with entrenched interests, but they are needed to provide the logistics industry necessary to support a rapidly growing economy competing in the global market. 58 CAMBODIA ECONOMIC UPDATE JUNE 2022 Annex S.1: Methodology for the Estimation of National Logistics Costs Per GDP in Cambodia The importance of estimating national logistics cost per GDP Logistics at the national level has gained much attention in many countries and at the global level, and there already exist a number of global logistics-related indicators developed by institutions such as the World Economic Forum and the World Bank to broadly measure logistics quality and performance across the board. These macro-level indicators can capture logistics performance, reflect logistics improvements, and be used as a benchmark for national competitiveness. 62 However, national logistics efficiency can also be evaluated in terms of trade-offs between a country’s economic output, that is, its gross domestic product (GDP), and its national logistics cost (NLC), to reflect national competitiveness. 63 Calculating NLC is a complex process as country-level and firm-level logistics activities are different and complex. 64 From the perspective of policymakers, governments may not be able to deal with such challenges related to national logistics performance if they do not have the ability to measure their respective domestic logistics performance and cost. 65 The ratio of logistics costs to GDP has been identified as a key indicator in measuring a country’s capability in terms of managing its logistics system. 66 Such indicator has been widely adopted by many countries to reflect its logistics capability. Cambodia’s Ministry of Economy and Finance (MEF) has recognized the importance for Cambodia to have such an indicator to assess the country’s overall logistics capability. Several countries have published their NLC as a percentage of GDP (NLC/GDP), but the method behind these calculations varies. 67 Different countries also use different data sources and calculation approaches. Comparing the ratio of NLC/GDP among countries is challenging due to the differing methodologies. Nonetheless, it is important to have baseline data for reference purposes as logistics development policies require in-depth data. Cambodia has never published its national logistics cost per GDP, but there exist some data related to logistics costs over sales in certain sectors. The challenge is that these numbers do not reflect the overall situation within the country, as they are sector specific. Concepts of national logistics cost per GDP Cambodia’s NLC percentage can be obtained by employing data from the national input and output (I-O) and GDP tables. The primary reason for using the I-O table is that it is one of the ways in which Cambodia’s economy can be represented by grouping activities into branches of industry. For simplicity, each industry is assumed to produce only one good with only one process of production. An industry buys raw materials from other industries and uses their “primary inputs” (for example, labour and capital) to produce goods/services. The produced goods/services may be sold to other industries, households, governments, and foreign countries. Sales to other industries are called “intermediate demand,” while sales to consumers are called “final demand.” The cost accounting approach used to calculate NLC/GDP is inspired by activity-based costing (ABC), where the unit of analysis is the national economy and not the firm, as is traditionally done. The ABC principle is used to identify logistics activities represented at the national level in the national I-O table. Using ABC can provide better costing information and help policymakers monitor more efficiently and 62 Havenga 2018. 63 Rantasila and Ojala 2012; Havenga 2018. 64 Wajszczuk 2005; Pishvaee et al. 2009. 65 Havenga 2010. 66 Banomyong and Varadejsatitwong, forthcoming. 67 Rantasila and Ojala 2012. 59 CAMBODIA ECONOMIC UPDATE JUNE 2022 gain a better understanding of the country’s competitive advantages, strengths, and weaknesses.68 ABC uses multiple cost drivers, many of which are transaction based rather than based on freight volume. Box S.A.1. Data Source The published Cambodia I-O tables are also known as “The Supply and Use Tables, Cambodia, USE Table” and “Supply and Use Tables, Cambodia, SUPPLY Table.” • The USE Table is used for calculating transport and warehousing cost, as it is based on purchaser’s price. • The SUPPLY Table is used for calculating inventory carrying cost, as it is based on producer’s price. • The Cambodian economy is classified into a 60x60 sector matrix at the current price basis. • In terms of available data, there are only data for 2011–2014. • 2014 is chosen as the reference year in estimating Cambodia’s NLC. There are four national logistics cost components identified in the literature: (1) transportation cost, (2) warehousing cost, (3) inventory carrying cost, and (4) logistics administration cost. 69 To obtain the NLC, each logistics cost component needs to be summated. The obtained value is then divided by Cambodia’s national GDP to obtain the NLC/GDP. In the national Cambodian I-O tables, the transportation and warehousing costs are combined in the USE table, inventory carrying cost is found in the SUPPLY table, and logistics administration cost is based on a proxy of 10 percent of the sum of transport, warehousing, and inventory carrying cost. Box S.A.2. Methodology Transport and warehousing cost In the USE Table, the value of the “Total Output” of two codes related to Transportation and Warehousing activities are used: - c29: Freight transport services - c29: Rental services of transport vehicles with operators - c29: Supporting transport services - c30: Postal and courier services. Inventory carrying cost In the SUPPLY Table, the value of the “Total Supply At Basic Prices” of I-O code c2-c23 (manufacturing sector) is used to calculate the value of inventory. That value of inventory is then multiplied by the average lending rate for that year. This is similar to calculating opportunity cost. The agriculture and services sectors are not included as it is assumed that these two sectors do not have inventory. In the case of the agriculture sector, it is assumed that all that is produced is immediately consumed or processed by the manufacturing sector. Logistics administration cost The logistics administration cost is equivalent to 10 percent of the sum of transportation, warehousing, and inventory carrying cost. This is a proxy used until the actual logistics administration cost in Cambodia is surveyed. The challenge in this exercise was that the latest publication year of the Cambodian I-O was 2014. To update the NLC/GDP, there was a need to impute the GDP growth rate for each sector and to use the 68 Grant et al. 2007. 69 Banomyong et al. 2021. 60 CAMBODIA ECONOMIC UPDATE JUNE 2022 GDP numbers for all subsequent years. These data are published by the Asian Development Bank in their basic statistics’ annual reports. 70 A limitation of the methodology relates to the data source, as the I-O and GDP tables were never designed for estimating national logistics cost. The data in the I-O table are easily obtainable but they are not available yearly. 70https://www.adb.org/publications/series/basic-statistics. 61 CAMBODIA ECONOMIC UPDATE JUNE 2022 References ADB (Asian Development Bank). 2019. “Cambodia: Transport Sector Assessment, Strategy, and Roadmap.” https://www.adb.org/sites/default/files/institutional-document/529231/cambodia- transportassessment-strategy-road-map.pdf. Arvis, J.-F., G. Raballand, and J.-F. Marteau. 2007. The Cost of Being Landlocked: Logistics Costs and Supply Chain Reliability. Policy Research Working Paper; No. 4258, World Bank, Washington, DC. https://openknowledge.worldbank.org/handle/10986/7420. Banomyong, R., and P. Varadejsatitwong. Forthcoming. “Estimating National Logistics Cost in Cambodia: A proposed methodology.” Draft working paper, World Bank, Washington, DC. Banomyong, R., D. B. Grant, P. Varadejsatitwong, and P. Julagasigorn. 2021. Developing and Validating a National Logistics Cost in Thailand. Transport Policy. World Bank, Washington, DC. (forthcoming) EuroCham. 2016. White Book 2016: Trade and investment Policy Recommendations. March. GIZ (Deutsche Gesellschaft fuer Internationale Zusammenarbeit). 2018. “Sustainable Freight Transport – Access to Finance”. Paul Apthrop. May 1, 2018. Gleissner, H., and J. C. Femerling. 2013. Logistics: basics-exercises-case studies. Heidelberg: Cham. Grant, D. B., I. Kiokpas, and T. Yiortsos. 2007. “Using activity-based costing for cost-to-serve in order fulfilment and warehouse management.” In Proceedings of the 12th Annual Logistics Research Network Conference, University of Hull (2007), pp. 637-642. Havenga, J. 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Sajadieh. 2009. “National logistics costs.” In Supply Chain and Logistics in National, International and Governmental Environment: Concepts and Models, edited by R. Z. Farahani, N. Asgari, and H. Davarzani. London: Springer Science & Business Media, pp. 57–83. 62 CAMBODIA ECONOMIC UPDATE JUNE 2022 Rantasila, K., and L. Ojala. 2012. “Measurement of national-level logistics costs and performance: discussion paper 2012–04.” International Transport Forum at the OECD, Paris. Wajszczuk, K. 2005. Logistics Costs Analysis as an Assisting Tool to Achieve Competitive Advantage for Agricultural Enterprises. European Association of Agricultural Economists, 2005 International Congress, Copenhagen, Denmark, August 23–27. Word Bank. 2022. Trade Watch. https://www.worldbank.org/en/topic/trade/brief/trade-watch World Bank. 2018. Background studies for the preparation of Cambodia Logistics Master Plan. http://documents1.worldbank.org/curated/en/111131540928774422/pdf/131518-v2-PUBLIC- Cambodia-Logistic-Master-Plan.pdf. World Bank. 2018. Connecting to Compete 2018: Trade Logistics in the Global Economy. World Bank, Washington, DC. World Bank. https://openknowledge.worldbank.org/handle/10986/29971 Connect to compete. 2018. World Customs Organization. 2021. WCO Annual Report 2020–2021. Geneva: World Customs Organization. 63 CAMBODIA ECONOMIC UPDATE JUNE 2022 Bibliography Estrades Pineyrua, Carmen, Maryla Maliszewska, Israel Osorio-Rodarte, Seara E. Pereira, and Maria Filipa. 2022. “Estimating the Economic and Distributional Impacts of the Regional Comprehensive Economic Partnership.” World Bank, Washington, DC. Ministry of Agriculture, Fisheries and Forestry. 2022. Annual Report for Agriculture, Fisheries and Forestry for 2021–22 and Direction for 2022–23. 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UNCTAD 2020. 64 SELECTED INDICATORS* 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 E 2022 F INCOME AND ECONOMIC GROWTH GDP growth (annual %) 6.7 0.1 6.1 7.1 7.3 7.4 7.1 7.0 6.9 7.0 7.5 7.1 -3.1 3.0 4.5 GDP per capita growth (annual %, real) 5.1 -1.4 4.5 5.4 5.6 5.6 5.4 5.3 5.3 5.4 5.9 5.5 -4.4 1.6 3.2 GDP per capita (US$, nominal) 744.5 737.9 812.9 891.6 949.8 1028.2 1100.5 1175.3 1269.8 1381.4 1506.2 1638.1 1552.2 1587.9 1735.1 Private Consumption growth (annual %) 12.7 -0.2 8.8 10.4 4.7 5.6 4.6 9.4 5.8 3.7 3.0 7.0 -0.8 1.3 1.3 Gross Investment ( % of nominal GDP) 17.3 20.1 16.2 16.0 17.4 18.7 20.9 21.4 21.7 21.9 22.6 23.4 23.6 51.1 26.9 Gross Investment - Public ( % of nominal GDP)2 6.3 8.8 9.6 10.7 9.1 9.1 8.2 6.9 6.7 6.8 6.7 7.7 8.6 7.1 8.8 MONEY AND PRICES Inflation, consumer prices (annual %, period average)3 12.3 3.1 2.6 3.4 1.4 2.2 1.2 1.8 3.5 3.3 3.1 3.2 2.9 3.5 7.2 Broad Money (% of GDP)² 28.3 37.7 41.6 39.1 50.1 55.5 67.1 72.4 79.2 88.2 100.7 116.4 139.4 172.7 185.8 Domestic Credit to the Private Sector ( % of GDP)2 23.5 24.6 27.6 28.3 38.7 52.0 62.7 74.3 81.7 86.7 99.6 114.2 139.9 .. .. 10 year interest rate (annual average)³ .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. Nominal Exchange Rate (local currency per USD) 4060.0 4140.0 4044.0 4016.0 4033.0 4027.0 4030.0 4025.0 4058.0 4062.0 4067.0 4070.0 4077.4 4100.0 4150.0 Real Exchange Rate Index (2015=100) .. 91.0 98.2 94.4 93.3 92.6 94.7 100.0 101.9 103.1 99.5 109.0 104.5 126.9 122.0 FISCAL Revenue (% of GDP) 16.4 15.9 17.7 17.6 17.7 18.2 20.0 19.7 20.9 21.9 23.8 27.0 24.1 20.9 21.4 Expenditure (% of GDP) 16.1 20.5 21.0 23.0 21.9 21.4 21.9 20.2 21.1 22.7 23.4 25.5 28.7 27.7 28.0 Interest Payments (% of GDP) 0.2 0.2 0.3 0.3 0.5 0.7 0.7 0.3 0.4 0.4 0.4 0.4 0.5 0.6 0.6 Non-Interest Expenditure (% of GDP) 15.9 20.3 20.7 22.7 21.4 20.7 21.2 19.9 20.7 22.3 23.0 25.1 28.3 27.1 27.5 Overall Fiscal Balance (% of GDP) 0.3 -4.6 -3.3 -5.4 -4.2 -3.2 -1.9 -0.5 -0.2 -0.8 0.4 1.5 -4.6 -6.8 -6.6 Primary Fiscal Balance (% of GDP) 0.5 -4.4 -3.0 -5.1 -3.7 -2.5 -1.2 -0.2 0.2 -0.4 0.8 1.9 -4.2 -6.2 -6.0 General Government Debt (% of GDP) 27.8 29.1 28.7 29.7 31.6 31.3 31.8 31.2 29.1 30.3 28.3 28.2 34.4 34.8 35.6 cheat EXTERNAL ACCOUNTS Export growth, G&S (nominal US$, annual %) 20.2 -24.4 22.9 11.4 16.0 16.8 10.3 7.5 9.0 9.4 12.3 8.5 2.1 24.2 24.9 Import growth, G&S (nominal US$, annual %) 11.3 -17.0 19.1 11.4 14.2 16.9 8.8 7.6 9.0 7.8 9.3 17.4 5.7 49.4 8.5 Merchandise exports (% of GDP) 49.4 33.9 38.3 38.8 41.6 44.6 45.4 45.4 45.5 45.2 46.0 46.0 51.9 62.9 69.9 65 Annex: Cambodia - Selected Indicators Merchandise imports (% of GDP) 58.2 46.8 50.4 50.5 53.7 57.5 57.5 57.3 56.9 55.6 55.1 54.6 65.8 92.6 91.0 Services, net (% of GDP) 6.5 6.2 6.8 6.3 7.3 7.8 7.7 7.5 7.0 7.0 7.4 1.8 4.0 6.1 10.7 Current account balance (current US$ millions) -622.3 -1120.4 -1165.3 -1309.3 -1390.7 -1489.3 -1899.7 -1680.6 -1756.6 -2140.5 -2180.1 -4107.7 -3221.0 -9953.7 -7360.6 Current account balance (% of GDP) -6.0 -10.8 -10.0 -10.1 -9.9 -9.6 -11.3 -9.2 -8.8 -9.7 -8.9 -15.2 -12.0 -37.0 -24.7 Foreign Direct Investment, net inflows (% of GDP) 7.6 8.8 11.8 11.8 14.0 13.0 10.6 9.5 12.0 12.1 12.6 13.2 13.5 12.6 11.6 External debt, total (% of GDP)2 25.6 31.8 35.7 36.3 48.0 50.0 49.8 52.3 50.3 51.5 55.1 56.6 68.0 .. .. Multilateral debt (% of total external debt)2 .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. Debt service ratio (% of exports goods and non-factor services)2 0.8 1.0 1.1 4.0 6.0 5.7 5.4 5.1 5.1 6.2 6.7 6.9 7.1 .. .. POPULATION, EMPLOYMENT AND POVERTY Population, total (millions) 13.9 14.1 14.3 14.5 14.8 15.0 15.3 15.5 15.8 16.0 16.2 16.5 16.7 16.9 17.2 Population Growth (annual %) 1.5 1.5 1.6 1.6 1.6 1.7 1.7 1.6 1.6 1.5 1.5 1.5 1.4 1.4 1.3 Unemployment Rate2 0.8 0.6 0.8 0.6 0.5 0.4 0.7 0.4 0.7 0.1 0.1 0.1 0.3 .. .. Inequality - Gini Coefficient2 .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. Life Expectancy2 65.4 66.0 66.6 67.0 67.5 67.9 68.3 68.6 69.0 69.3 69.6 69.8 .. .. .. OTHER GDP (current LCU, millions) 41968385 43056732 47047985 52068693 56616800 62219524 67740436 73422702 81241866 89830525 99544275 109,916,799 105,811,280 110,325,159 123,628,246 GDP (current US$, millions) 10337.0 10400.2 11634.0 12965.3 14038.4 15450.6 16809.0 18241.7 20020.2 22114.9 24476.1 27,007 25,950 26,909 29,790 GDP per capita LCU (real) 2062211.4 2033232.2 2124293.2 2238619.2 2363486.0 2495840.9 2630659.9 2769140.2 2915146.1 3071748.4 3252348.4 3,431,774 3,279,159 3,332,285 3,437,765 Human Development Index Ranking⁴ 142 142 143 143 145 144 144 146 146 145 144 144 .. .. .. CPIA (overall rating)2 3.3 3.3 3.4 3.4 3.5 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 .. .. Economic Management2 3.8 3.8 4.0 3.8 3.8 3.8 3.8 4.0 4.0 4.0 4.2 4.2 4.2 .. .. Structural Policies2 3.3 3.3 3.3 3.5 3.7 3.7 3.7 3.5 3.5 3.3 3.3 3.3 3.3 .. .. Policies for Social Inclusion and Equity2 3.3 3.3 3.4 3.5 3.5 3.4 3.4 3.4 3.4 3.4 3.4 3.5 3.5 .. .. Public Sector Management and Institutions2 2.7 2.7 2.7 2.8 2.8 2.8 2.8 2.7 2.7 2.7 2.6 2.6 2.7 .. .. Notes: ".." indicates not available. E = estimate, F = forecast. Data from MFMOD unless otherwise noted 1/ Used latest month available. 2/ World Development Indicators Database and World Bank Staff Estimates 3/ World Bank GEM database; MRV = Most recent value 4/ The HDI ranking in 2001 is in relation to 175 countries and in 2010 in relation to 169 countries. Methodological enhancements in HDI calculations have resulted in notable improvements in the countries' rankings. CAMBODIA ECONOMIC UPDATE JUNE 2022 Sources: MFMOD Database, World Bank WDI and GEM databases, IMF. CAMBODIA ECONOMIC UPDATE JUNE 2022 66