CAMBODIA ECONOMIC UPDATE - World Bank

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Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedCAMBODIA ECONOMIC UPDATECAMBODIA IN THE TIME OF COVID-19SPECIAL FOCUSTeacher Accountability and StudentLearning OutcomesMAY 2020

CAMBODIAECONOMICUPDATEMAY 2020Cambodiain the time ofCovid-19

TABLE OF CONTENTSTABLE OF CONTENTSACKNOWLEDGEMENTS 1ABBREVIATIONS 2EXECUTIVE SUMMARY 3RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 11Recent developments 11Economic activity quickly diminished due to the global COVID-19 outbreak 11While Cambodia has avoided a health crisis so far, it has not been immune fromthe economic crisis sweeping the global economy 12The tourism and hospitality industry has faced both a structural slowdown andsevere impacts of the COVID-19 outbreak 12The COVID-19 pandemic has triggered an unprecedented export demand shock 14Garment, footwear, and travel goods export growth decelerated quickly in the first quarter of 2020 15Exports of travel goods (and other textile products) outpaced those of footwear in 2019 15The United States became the largest market for Cambodia’s combined garment, travel goods,and footwear exports 15The Japanese market appears promising for Cambodia’s exports of electronic and vehicle partsand accessories 16Approved FDI project value contracted by 52.2 percent in the first two months of 2020 17The majority of approved FDI continued to go to the construction and real estate sector 17In early 2020, construction activity weakened significantly due to the global COVID-19 outbreak 17The global COVID-19 outbreak disrupted domestic demand and consumption 18The current account deficit remained stable and fully financed by FDI last year 19FDI inflows decelerated in 2019 19The agriculture sector’s contribution to GDP growth contracted in 2019 19The agriculture sector is unlikely to be able to substantially absorb laid-off workers fromthe tourism and export sectors 20Returning migrant workers will put further pressure on Cambodia’s shrinking job market 20Reflecting the impact of the COVID-19 outbreak, inflation was subdued in the first quarter of 2020 21Broad money growth declined as foreign currency deposits slowed 21Pressure on the exchange rate is rising 24By the end of 2019, growth of (net) bank credit to businesses eased for the first timesince mid-2018 25Rising domestic bank credit to the construction, real estate, and mortgage sector,however, continued 25Implications for domestic revenues 26Revenue collection peaked last year 27ivCAMBODIA ECONOMIC UPDATE MAY 2020

TABLE OF CONTENTSExpenditure performance also accelerated last year 27In response to the COVID-19 outbreak, the 2020 budget was announced by the authoritiesas an austerity budget 27To finance the widening fiscal deficit, public debt is expected to rise to 35 percent of GDP by 2022 28China remains the largest creditor, accounting for almost half of Cambodia’s outstanding debt 28Outlook 29The economy is being hit hard by the COVID-19 outbreak 29Under the baseline scenario, real growth is projected to contract by 1.0 percent in 2020 29Under the downside scenario, real GDP is projected to contract by 2.9 percent in 2020 31Policy options 31SPECIAL FOCUS: TEACHER ACCOUNTABILITY AND STUDENT LEARNINGOUTCOMES 35Case Studies of Selected School Models 35Strengthening Accountability to Improve the Quality of Education 35Introduction 35Efforts to bring the education sector to the next level 371. Access to education has been expanded 372. Salaries for teachers and education staff have been increased 373. However, student learning outcomes have not improved 384. New Generation School introduced a new level of accountability and autonomy andquality of education services 405. School-Based Management improved accountability for community 42Main challenges to improving student learning outcomes in public schools 441. School governance and accountability to the community remained ineffective 442. Teacher incentives are not based on performance, and that may lead to a widening gapin education quality between public and private schools 473. Both the surplus and shortage of teachers negatively affect student learning 504. Low level of government investment for professional development of school directorsand teachers 51CONCLUSION 53ANNEX 1: ADVANTAGES, DISADVANTAGES, AND POLICY OPTIONS FOR EACHSCHOOL MODEL 54ANNEX 2: CAMBODIA’S KEY INDICATORS UNDER THE BASELINE SCENARIO 56BIBLIOGRAPHY 57ADDITIONAL REFERENCES 58CAMBODIA ECONOMIC UPDATE MAY 2020v

ACKNOWLEDGEMENTSACKNOWLEDGEMENTSThe May 2020 Cambodia Economic Update(CEU) was prepared by Sodeth Ly, withcontributions from Claire Honore Hollweg,Sokbunthoeun So, Donna Andrews, Khy Touk,and Sokunpanha You. Other contributors includeFata No, Ekaterine Vashakmadze, Simeth Beng,Pisith Phlong, Linna Ky, Kimsun Tong, andRunsinarith Phim. Saroeun Bou and ChankeseyHeav helped with the press release, logisticssupport, web display, and dissemination events.The team worked under the overall guidanceof Deepak Mishra. The team is grateful forthe advice and comments provided by IngunaDobraja, Mariam Sherman, and Hassan Zaman.Several colleagues provided comments on thedraft version including Aaditya Mattoo, AndrewMason, Ekaterine Vashakmadze, and ErgysIslamaj and Vera Kehayova.The team is grateful to the Cambodian authorities,particularly the Ministry of Economy andFinance and the National Bank of Cambodia, fortheir cooperation and support. The report alsobenefited from the advice, comments, and viewsof various stakeholders in Cambodia, including itsenthusiastic readers and critics.The team also gratefully acknowledges financingfrom a Multi-Donor Trust Fund on Public1CAMBODIA ECONOMIC UPDATE MAY 2020Financial Management and Service Deliverycontributed by Australia and the European Unionfor the preparation of the special focus section ofthis report.The CEU, produced biannually, providesup-to-date information on macroeconomicdevelopments in Cambodia. It is distributed anddiscussed widely including among Cambodianauthorities, development partners, the privatesector, think tanks, civil society organizations, andacademia.For information about the World Bank and itsactivities in Cambodia, please visit our website atwww.worldbank.org/cambodia.To be included in the email distribution list ofthe CEU and related publications, please contactChankesey Heav (cheav@worldbank.org). Forquestions on the contents of this publication,please contact Saroeun Bou (sbou@worldbank.org).The findings, interpretations, and conclusionsexpressed in this report do not necessarily reflectthe views of the Executive Directors of theWorld Bank or the governments they represent.The World Bank does not guarantee the accuracyof the data included in this work.

SCUKU.S.US VATVIXWBGWDIWTTCy/y or yoyAssociation of Southeast Asian NationsBaccalauréatWithdrawal of the United Kingdom from the European UnionChicago Board Options Exchange’sCambodia Economic UpdateCambodian rielDistrict Office of Educationdebt sustainability analysisdebt sustainability analysisEuropean Commissionemerging markets and developing economiesEuropean Unionforeign currency depositgross domestic productHuman Resource Management Information SystemInternational Labor OrganizationInternational Monetary FundKey Performance IndicatorsLiquidity-Providing Collateralized OperationMinistry of Education, Youth, and SportsNational Board for Professional Teaching Standardsnegotiable certificate of depositNew Generation Schoolnonperforming loanOrganisation for Economic Co-operation and DevelopmentPurchasing Managers’ IndexProgram for International Student AssessmentProvincial Office of EducationProvincial Teacher Training Centerquarter-on-quarterRegional Teacher Training Centerseasonally adjusted annual rateSchool-Based ManagementSchool Management Committeesmall and medium-sized enterpriseSchool Support CommitteeUnited KingdomUnited StatesUnited States dollarvalue-added taxVolatility IndexWorld Bank GroupWorld Development IndicatorsWorld Travel and Tourism Councilyear-on-yearCAMBODIA ECONOMIC UPDATE MAY 20202

EXECUTIVE SUMMARYEXECUTIVE SUMMARYThe global epidemiological and economic crisis unleashedby COVID-19 poses the greatest threat to Cambodia’sdevelopment in its 30 years of modern history. The threemost affected sectors—tourism, manufacturing exports,and construction—contributed more than 70 percent ofgrowth and 39.4 percent of total paid employment in2019. Therefore, in the current year, Cambodia’s economyis likely to register its slowest growth since 1994, contractingbetween -1 percent (baseline) and -2.9 percent (downside).Poverty could increase between 3 and 11 percentage pointsfrom a 50 percent income loss that lasts for six monthsfor households engaged in tourism, wholesale and retailtrade, garment, construction, or manufacturing. Thefiscal deficit could reach its highest level in 22 years, andpublic debt is expected rise to 35 percent of gross domesticproduct (GDP) by 2022. The authorities have introducedemergency measures to contain the outbreak and providefiscal assistance to affected households, workers, andenterprises. To facilitate a robust recovery, the governmentwill need to continue to ensure macroeconomic and financialsector stability and accelerate trade and investment reformsas well as encourage faster adoption of digital technologies.An unprecedented shockIn Cambodia, the first case of coronavirus wasconfirmed on January 27, 2020, and as of May12, 2020, there are 122 cases.1 The Cambodianauthorities have taken swift action to detect andprevent local outbreaks by imposing a travel banon visitors from severely infected countries, closingschools, urging citizens to avoid mass gatherings,and postponing mass celebrations of the KhmerNew Year ceremony in mid-April, including animposition of a lockdown during the three-dayKhmer New Year celebration period (see box 1 formore details). In April 2020, a “State of Emergency”law was urgently adopted (and ready to be declared,if there are public health emergencies).While Cambodia has so far avoided a healthcrisis, it has not been immune from theeconomic crisis sweeping the global economy.The growth impact of COVID-19 hinges on the13contagion, severity, and duration of the outbreak,the response of societies, and the magnitudeand effectiveness of policy actions. The directcosts of preventive measures to contain a localoutbreak currently appear manageable. However,the outbreak caused sharp decelerations in mostof Cambodia’s main engines of growth in the firstquarter of 2020, including weakened tourism (andhospitality) and construction activity and, morerecently, the export sector.Transmission channelsThe spillovers of COVID-19 are being feltlargely through three key channels: tourism,exports, and foreign direct investment (FDI)(table ES.1). Cambodia has been heavily relianton tourists from the East Asia and Pacific region,especially Chinese tourists, who account for 35percent of total international arrivals. Internationalarrivals rapidly declined after the COVID-19outbreak in China. As the virus spread from Chinato the rest of the world, tourism activity has cometo a standstill.Table ES.1. Cambodia has strong economiclinkages with countries affectedby COVID-19Top 5 markets for Cambodia’s merchandise exports,tourist arrivals and FDI origins (2019, percent)ExportsTourismFDI inflowsU.S.26.8 China32.6 China40.0E.U.25.0 Vietnam12.9 Hong Kong, 10.9PRC SARJapan7.7 Lao PDR6.9 Korea, Rep.7.8Canada 6.2 Thailand6.2 Singapore7.1UK6.1 Korea, Rep.4.9 Japan6.2ROW38.2 ROW36.5 ROW28.0Sources: U.S. Comtrade; Cambodian authorities; and WorldBank staff estimates.Note: Total merchandise exports US 25,199.39 million(2019); foreign arrivals 6.61 million (2019); and FDI inflows US 2,845 million (2019e). ROW rest of the world.World Health Organization; ambodia-inthe-fight-against-covid-19.CAMBODIA ECONOMIC UPDATE MAY 2020

EXECUTIVE SUMMARYFinally, FDI inflows, which lately have gonelargely to the construction sector, haveoriginated from a small number of regionalcountries, especially China. The greater Chinaregion, which includes Hong Kong SAR, China,and Taiwan, China, accounts for more than 50percent of total FDI inflows in recent years. It isestimated that about half of FDI inflows havegone to the construction and real estate sector.After the COVID-19 outbreak in China, the valueof approved FDI projects significantly contracted.i. Tourism—the hardest-hit sectorThe demand for tourism and hospitalityservices has largely collapsed in recent months.The global response to contain the COVID-19outbreak has resulted in prolonged internationaltravel restrictions and internal lockdowns. Duringthe first two months of 2020, tourist arrivalscontracted by 25.1 percent (year-on-year [y/y])—thefirst contraction since the 2008–09 global financialcrisis. Siem Reap, Cambodia’s most popular touristdestination, experienced a 45.6 percent decline intourist arrivals during the first quarter and a 99.6percent reduction (y/y) in April 2020.2Tourism (including hospitality) is the secondlargest growth driver, estimated to havecontributed about 18.7 percent of real GDPgrowth in 2019 (table ES.2).3 The tourism sector isan important foreign exchange earner, accountingfor more than three-quarters of Cambodia’sservices exports, and about one-fifth of its totalgoods and services exports.234Contribution to GDPgrowth (2019, percent)Direct employment (’000)Percent of paidemployment1Percent of non-farmemploymentPercent of totalemploymentTotalConstructionDrivers of growthGarmentand footwearTable ES.2. Impacts of the COVID-19outbreak on Cambodia’s maingrowth drivers and employmentTourismThe lack of external demand has beenamplified by the fact that Cambodia’s exportsare significantly concentrated by both productsand destinations. The key exported productsinclude garments, footwear, travel goods, and rice.The combined U.S. and EU markets compriseabout 52 percent of Cambodia’s total merchandiseexports. In addition, exports rely on imports ofintermediate goods (raw materials for Cambodia’sgarment, footwear and travel goods industries)which earlier experienced supply chain disruptions.The collapse of global trade has significant negativedirect and indirect impacts on Cambodia.18.7 17.0 35.7 71.4620941 200 1,76113.9 21.04.5 39.411.2 17.03.6 31.97.1 10.72.3 20.1Source: Cambodian authorities and World Bank staffestimates.Note: 1. Wage employment.ii. The trade sectorThe COVID-19 pandemic has also triggeredan unprecedented export demand shock, aftercausing supply chain disruptions. As a result, alarge part of garment, footwear, and travel goodsorders from the two main destinations, namelythe United States and EU, have either been frozenor cancelled. This occurred after Cambodia’smanufacturing export industries experienced supplychain disruptions causing some garment factoryclosures in early March 2020. As shown in tableES.2, in 2019, the garment and footwear industrycontributed to almost one-fifth of GDP growth. Inaddition, the EU has announced the withdrawal oftariff preferences and their replacement with theEU’s standard tariffs (most-favored nation MFN),which will affect selected garment and footwearproducts, and all travel

Economic activity quickly diminished due to the global COVID-19 outbreak 11 While Cambodia has avoided a health crisis so far, it has not been immune from

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