IMF employs new technique to evaluate Cambodia’s medium-term growth potential
IMF employs new technique to evaluate Cambodia’s medium-term growth potential
The International Monetary Fund (IMF) states that Cambodia can achieve annual growth of approximately 6 per cent by 2030 – and potentially nearly 8 per cent if it adheres to the historical examples set by China, Japan, and South Korea.
“Cambodia’s economy is at a crossroads,” notes the IMF’s annual staff report on Cambodia released in Washington on Monday.
“While the economic recovery continues, its pace remains uneven,” the report observes.
“The sharp slowdown in credit growth has revealed the economy to increased vulnerabilities within the financial sector.
“Policy formulation must ensure a sustainable and inclusive recovery in the near term, while also achieving development goals over the medium term.”
REFOCUSING GROWTH DRIVERS
With Cambodia anticipated to graduate from the status of Least Developed Country (LDC) in 2030, “the path forward will necessitate a refocus on more resilient and diversified growth drivers.”
To project medium-term growth for 2030, the IMF employs a new machine-learning technique that utilises historical growth trajectories of other countries with comparable economic conditions.
The economies analysed at various periods include India, Indonesia, Laos, Sri Lanka, Japan, Bangladesh, South Korea, Poland, the Philippines, Bolivia, Djibouti, China, Vietnam, Peru, Morocco, Thailand, and Uzbekistan.
‘DYNAMIC TIME WARPING’
The technique known as dynamic time warping identifies episodes in other countries whose economic indicators closely mirror those of the target country – in this case, Cambodia.
These episodes, which occurred at various times from the latter half of the 20th century to the early 21st century, resemble Cambodia’s experience from 2015 to 2019.
Growth during these periods is then utilised to project the potential growth path for the target country.
Aggregating the episodes for Cambodia in 2030 yields an average forecast of 5.8 per cent and a median forecast of 6.3 per cent.
If Cambodia’s economy outperforms, forecasts indicate potential growth of 7.5 per cent to 7.9 per cent for 2030.
However, the IMF states that such outperformances “tend to face slower growth in subsequent periods” and are “statistically unlikely to maintain the same performance ranking over extended periods.”
CHINESE, JAPANESE AND KOREAN EXCEPTIONALISM
The report, however, notes exceptional ‘outlier” economies that sustained high growth – including Japan (1956-1967), South Korea (1971-1986), and China (1996-2002).
Common features included export-oriented industrialisation policies and strategic integration into global value chains as key drivers of rapid and sustained growth.
“Additionally, high investments in human capital through education and health infrastructure have been cited as critical factors that enable these countries to continuously ascend to higher tiers of the global value chain,” the report states.
“Institutional reforms that improved governance, protected property rights, and fostered an enabling environment for private-sector development have also been identified as important enablers of sustained growth.”
CAMBODIA’S POTENTIAL FOR SUSTAINED HIGH GROWTH
While Cambodia is lagging in terms of human capital accumulation and labour productivity, the IMF perceives potential through the examples set by China, Japan, and South Korea. Factors behind their past performances are strategies that could enhance the likelihood of Cambodia becoming a sustained high-growth outlier, it notes.
In the short term, the IMF identifies reforms aimed at diversifying growth and improving productivity—specifically, upgrading and expanding Cambodia’s export base, enhancing the country’s global positioning in supply chains, and increasing its capacity to produce more complex items and services.
The IMF states that promoting investment in higher-value-added industries, production networks, logistics, and low-cost renewable energy generation, among other essential infrastructures, will bolster competitiveness.
It adds that integrating productivity gains in agriculture is also crucial for macroeconomic transformation, necessitating the promotion of agro-processing industries to stimulate growth in value-added production.
OBSTACLES TO DOING BUSINESS
The report highlights that the high cost of electricity is frequently cited by foreign investors as “one of the most significant obstacles to doing business,” with Cambodia’s rates nearly double those of neighbouring Vietnam.
“Developing a comprehensive energy strategy to reduce costs and improve reliability is essential for enhancing competitiveness,” it states.
“Moreover, uncertainty regarding the enforcement and interpretation of laws, as well as governance-related issues, are concerns often reported by foreign businesses.”
“Targeted reforms would significantly enhance governance frameworks, improve transparency, and strengthen investor confidence.”
