CAMBODIA ECONOMIC UPDATE LIVING WITH COVID SPECIAL FOCUS THE IMPACT OF THE COVID-19 PANDEMIC ON LEARNING AND EARNING IN CAMBODIA DECEMBER 2021 CAMBODIA ECONOMIC UPDATE DECEMBER 2021 LIVING WITH COVID TABLE OF CONTENTS TABLE OF CONTENTS ACKNOWLEDGEMENTS������������������������������������������������������������������������������������������������������������������������ 7 ABBREVIATIONS������������������������������������������������������������������������������������������������������������������������������������� 8 EXECUTIVE SUMMARY�������������������������������������������������������������������������������������������������������������������������� 9 RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK������������������������������������������������������������16 Recent developments��������������������������������������������������������������������������������������������������������������������������16 Living with COVID-19���������������������������������������������������������������������������������������������������������������������������������������������������������16 Outbreaks lingered but showed signs of abating��������������������������������������������������������������������������������������������������������������16 83.0 percent of the population has been fully vaccinated�����������������������������������������������������������������������������������������������17 The authorities have fully “reopened” Cambodia for business��������������������������������������������������������������������������������������17 The region is witnessing a reversal of fortune������������������������������������������������������������������������������������������������������������������17 Cambodia is graduating from least developed country (LDC) status in the next several years���������������������������������19 Thanks to improved external demand conditions, goods exports accelerated�������������������������������������������������������������19 Manufacturing exports to the United States, the largest exports market, surged��������������������������������������������������������20 Likely due to travel restrictions, approved FDI remained weak�������������������������������������������������������������������������������������21 Good progress is achieved under business registration reforms������������������������������������������������������������������������������������22 Large property development project activity remained subdued�����������������������������������������������������������������������������������22 Despite less favorable weather conditions, agricultural production marginally increased������������������������������������������25 A newly introduced investment law is expected to boost export competitiveness������������������������������������������������������25 Cambodian parliament ratified CCTFA and RCEP����������������������������������������������������������������������������������������������������������26 Cambodia signed a free trade agreement with the Republic of Korea��������������������������������������������������������������������������26 Tourism activity is slowly picking up, thanks to the relaxation of travel restrictions��������������������������������������������������26 While remaining weak, domestic consumption marginally picked up���������������������������������������������������������������������������27 Inflation edged up as oil prices increased���������������������������������������������������������������������������������������������������������������������������27 The exchange rate has been under increased pressures caused by external imbalances���������������������������������������������28 The current account deficit deteriorated as the trade deficit widened���������������������������������������������������������������������������29 Monetary policy easing continued���������������������������������������������������������������������������������������������������������������������������������������30 Broad money growth partly recovered�������������������������������������������������������������������������������������������������������������������������������31 Credit growth recovered, while deposit growth improved����������������������������������������������������������������������������������������������31 The latest financial stability review indicated that the financial and banking sector remained resilient�������������������32 The pandemic substantially impacted jobs and poverty��������������������������������������������������������������������������������������������������32 Subdued domestic economic activity caused revenue collection to ease further���������������������������������������������������������33 Despite increased fiscal intervention, government expenditure remained contained�������������������������������������������������33 A widening fiscal deficit as the pandemic reversed years of extraordinary revenue gains�����������������������������������������34 Despite rising public debt, risk of debt distress remains low�����������������������������������������������������������������������������������������36 The draft 2022 budget supports continued fiscal expansion������������������������������������������������������������������������������������������36 Outlook������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������37 Challenges and risks���������������������������������������������������������������������������������������������������������������������������������������������������������������37 Policy options��������������������������������������������������������������������������������������������������������������������������������������������������������������������������39 SPECIAL FOCUS: THE IMPACT OF THE COVID-19 PANDEMIC ON LEARNING AND EARNING IN CAMBODIA��������������������������������������������������������������������������������������������������������������������� 42 Introduction��������������������������������������������������������������������������������������������������������������������������������������� 42 The government successfully prevented a major disease outbreak, but at significant cost to the education system and students��������������������������������������������������������������������������������������������������� 43 Education will also suffer from the pandemic’s economic and health impacts������������������������������� 46 Income shocks and increased poverty will result in more dropouts������������������������������������������������������������������������������46 Poor nutrition makes it harder to learn�������������������������������������������������������������������������������������������������������������������������������47 4 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 TABLE OF CONTENTS, BOXES & FIGURES Pre-Pandemic Learning Challenges�������������������������������������������������������������������������������������������������� 48 Efforts to mitigate the impact of school closures on student learning�������������������������������������������� 49 MoEYS launched remote learning programs across multiple channels������������������������������������������������������������������������49 Teachers and caregivers had to transition to remote learning with little preparation or training������������������������������51 Most students had access to ICT and learning materials, but still had trouble accessing remote learning programs����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������52 Use of remote learning programs has been low���������������������������������������������������������������������������������������������������������������54 Remote education is generally not as effective as in-person education�������������������������������������������������������������������������55 Lost learning will lower future earning��������������������������������������������������������������������������������������������� 56 Learning losses������������������������������������������������������������������������������������������������������������������������������������������������������������������������56 Earning losses�������������������������������������������������������������������������������������������������������������������������������������������������������������������������58 Cambodia needs to stem the learning loss and build back better���������������������������������������������������� 58 Ensure a safe and effective return to schools��������������������������������������������������������������������������������������������������������������������59 Improve remote learning programs to mitigate learning loss and insure against another shutdown�����������������������60 Assess student learning and improve pedagogy and instruction to help students catch up��������������������������������������61 Make long-term investments to improve Cambodia’s education system����������������������������������������������������������������������62 Annex. Selected indicators���������������������������������������������������������������������������������������������������������������� 63 Notes����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������64 Bibliography����������������������������������������������������������������������������������������������������������������������������������������������������������������������������68 BOXES Box 1: Global economic developments and outlook���������������������������������������������������������������������������������������������18 Box 2: Cambodia: Summary of Investment Incentives under the Law on Investment�����������������������������������23 Box 3: Impacts of COVID-19 on households—results from the High-Frequency Phone Survey of Households�������������������������������������������������������������������������������������������������������������������������������������������������������35 Box S.1. Popular remote-learning channels in Cambodia�����������������������������������������������������������������������������������������50 FIGURES Figure ES.1. Cambodia’s recent developments at a glance����������������������������������������������������������������������������������������������13 Figure 1: After resurging, coronavirus cases have declined���������������������������������������������������������������������������������������16 Figure 2: Vaccinations accelerated���������������������������������������������������������������������������������������������������������������������������������16 Figure 3: Cambodia’s goods exports recovered�����������������������������������������������������������������������������������������������������������20 Figure 4: Contribution of major markets to GTF exports growth��������������������������������������������������������������������������20 Figure 5: Approved construction permits declined����������������������������������������������������������������������������������������������������22 Figure 6: Imports of basic construction materials and equipment remained subdued����������������������������������������22 Figure 7: Approved construction permits for Sihanoukville province eased���������������������������������������������������������24 Figure 8: International arrivals and Angkor revenue collapsed���������������������������������������������������������������������������������24 Figure 9: Imports of consumer goods slowly recovered�������������������������������������������������������������������������������������������27 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 5 FIGURES & TABLES Figure 10: Inflation edged up�������������������������������������������������������������������������������������������������������������������������������������������27 Figure 11: Inflation of Cambodia’s main importing partners�������������������������������������������������������������������������������������28 Figure 12: The nominal exchange rate was broadly stable, within a ±2 percent range�������������������������������������������28 Figure 13: The current account deficit deteriorated quickly����������������������������������������������������������������������������������������29 Figure 14: Gross international reserves eased���������������������������������������������������������������������������������������������������������������29 Figure 15: Broad money (M2) growth recovered����������������������������������������������������������������������������������������������������������30 Figure 16: Domestic credit growth improved����������������������������������������������������������������������������������������������������������������30 Figure 17: The contribution of construction to credit growth accelerated��������������������������������������������������������������31 Figure 18: The general government overall fiscal deficit widened�����������������������������������������������������������������������������31 Figure B1.1. Manufacturing and services PMI������������������������������������������������������������������������������������������������������������������18 Figure B1.2. Commodity prices (Index, nominal term, 2010 = 100)����������������������������������������������������������������������������18 Figure B3.1. Respondents (LSMS+) or household’s main earner (IDPoor) working in last 7 days��������������������������35 Changes in sales revenues in non-farm household businesses relative to last month��������������������������35 Figure B3.2.  Figure S1: Estimated learning and earning losses are substantial�������������������������������������������������������������������������������42 Figure S2: Cambodia kept its schools closed longer than most countries in developing EAP������������������������������45 Figure S3: Cambodia has had fewer cumulative COVID-19 cases per capita than most of its neighbors, but cases and government restrictions have been higher in recent months�������������������������������������������46 Figure S.4. Dropout rates increased during the pandemic��������������������������������������������������������������������������������������������47 Figure S.5. Cambodia’s total years of expected schooling are the lowest on mainland Asia, although relative quality is higher than its close peers������������������������������������������������������������������������������������������������48 Figure S.6. Caregivers, students, and teachers were not satisfied with the support they received in the transition to remote learning�������������������������������������������������������������������������������������������������������������������51 Figure S.7. Household access to mobile phones has increased dramatically in Cambodia in recent years�����������52 Figure S.8. Most students have access to basic learning materials�������������������������������������������������������������������������������53 Figure S.9. Use of remote learning programs has been low and declining over time����������������������������������������������54 Figure S.10. A large share of the student population was not engaged in learning activities during school closures��������������������������������������������������������������������������������������������������������������������������������������������������������������57 TABLES Table 1: Progress on Business Registration Reforms������������������������������������������������������������������������������������������������21 Table 2: Government fiscal intervention��������������������������������������������������������������������������������������������������������������������34 Table 3: Macro outlook��������������������������������������������������������������������������������������������������������������������������������������������������38 Table S.1. Timeline of policy actions and related developments affecting schools and learning, 2020–2021.....44 Table S.2. Remote learning channels in Cambodia........................................................................................................50 Table S.3. Almost all students and caregivers have access to some form of ICT or other learning material......53 Table S.4. Learning and earning losses are large in every scenario.............................................................................56 6 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 ACKNOWLEDGEMENTS ACKNOWLEDGEMENTS The December 2021 Cambodia Economic The CEU, produced biannually, provides Update (CEU) was prepared by Sodeth Ly, with up-to-date information on macroeconomic contributions from Bradley Robert Larson, Simeth developments in Cambodia. It is distributed and Beng, Fata No, Kimsun Tong, Wendy Karamba, discussed widely including among Cambodian Ekaterine Vashakmadze and Runsinarith Phim. authorities, development partners, the private Chankesey Heav served as research assistant. sector, think tanks, civil society organizations, and Saroeun Bou helped with the press release, web academia. display, and dissemination events. For information about the World Bank and its The team worked under the overall guidance of activities in Cambodia, please visit our website at Sebastian Eckardt. The team is grateful for the www.worldbank.org/cambodia. advice and comments provided by Maryam Salim, To be included in the email distribution list of Mariam Sherman, and Hassan Zaman. Several the CEU and related publications, please contact colleagues provided comments on the draft Chankesey Heav (cheav@worldbank.org). For version including Aaditya Mattoo, Toby Linden, questions on the contents of this publication, Tara Beteille, Tobias Pfutze, Ergys Islamaj, please contact Saroeun Bou (sbou@worldbank.org). Duong Le, and Daisuke Fukuzawa. The findings, interpretations, and conclusions The team is grateful to the Cambodian authorities, expressed in this report do not necessarily reflect particularly the Ministry of Economy and the views of the Executive Directors of the Finance and the National Bank of Cambodia, for World Bank or the governments they represent. their cooperation and support. The report also The World Bank does not guarantee the accuracy benefited from the advice, comments, and views of the data included in this work. of various stakeholders in Cambodia, including its enthusiastic readers and critics. CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 7 ABBREVIATIONS ABBREVIATIONS ASEAN Association of Southeast Asian Nations CCFTA Cambodia-China Free Trade Agreement CDP Committee for Development Policy (of the United Nations) CEU Cambodia Economic Update COVID-19 coronavirus disease 2019 CR Cambodian riel DFQF duty-free, quota-free EAP East Asia and Pacific region EMDEs emerging market and developing economies ECOSOC Economic and Social Council EU European Union FDI foreign direct investment FTA free trade agreement GDP gross domestic product GTF garment, travel, and footwear GSP Generalized System of Preferences HLO Harmonized Learning Outcomes ICT information and communications technology IDPoor identification of poor LAYs learning-adjusted years of schooling LCR liquidity coverage ratio LDC least developed country MDI Microfinance Deposit-Taking Institution MLF Marginal Lending Facility MoEYS Ministry of Education, Youth, and Sports NBC National Bank of Cambodia NPL nonperforming loan PPP purchasing power parity RCEP Regional Comprehensive Economic Partnership ROA return on assets ROE return on equity UK United Kingdom UN United Nations UNESCO United Nations Educational, Scientific, and Cultural Organization U.S. United States US$ United States dollar WHO World Health Organization y/y year-on-year 8 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 EXECUTIVE SUMMARY EXECUTIVE SUMMARY Recent developments of a few major items, especially gold used as a savings asset. Gold imports surged, reaching more Cambodia is now living with COVID-19. Since US$4.08 billion during the first nine months of November 1, 2021, the authorities have relaxed 2021, reflecting a hedge against price volatility and travel restrictions, “reopening” the country for inflation, which is edging up. Widening external business while continuing to strictly enforce imbalances have put pressure on the exchange protective health measures. Coronavirus infections rate. In response, the central bank has intervened and mortalities receded in the fourth quarter of in the foreign exchange market by conducting 2021, thanks mainly to the country’s success in open market operations. The current account rolling out its vaccination program. More than 80 deficit, which is partly affected by the collapse percent of the population received two doses of of travel and tourism receipts, has deteriorated coronavirus vaccine as of end-November 2021. The substantially to an estimated 26.9 percent of required quarantine period for those who have GDP in 2021. However, it remains fully financed been fully vaccinated has been fully lifted since by foreign direct investment (FDI) and other November 15, 2021, as the country is planning to investment inflows. Gross international reserves implement an economic recovery plan soon. declined only marginally to US$19.3 billion (about Real gross domestic product (GDP) is ten months of imports) in September 2021, down projected to grow 2.2 percent this year. This from US$21.2 billion at the end of 2020. Caused year’s relatively weak growth is due to a resurgence mainly by higher oil prices, inflation has edged up, of COVID-19 cases, which slowed the recovery, reaching 3.4 percent year-on-year (y/y) in August especially of the tourism, wholesale, and retail 2021, compared to 3.1 percent at the end of 2019, sectors during the second and third quarters of despite a broadly stable nominal exchange rate, 2021. Traditional growth drivers, especially the which hovered around 4,100 Cambodian riel per garment, travel goods, footwear, and bicycle U.S. dollar. manufacturing industries, as well as agriculture, Financial conditions continued to be continue to underpin the economic recovery. accommodative, supported by a relaxation The electrical, electronic, and vehicle parts of monetary policy. The central bank under its manufacturing industries are gradually emerging, third-round monetary easing measures introduced while the agroprocessing industries, in particular in May 2021 decided, among others, to (i) maintain food and wood processing, and furniture are a reserve requirement ratio at 7 percent for both also picking up. The service sector, especially riel and U.S. dollar deposits and borrowings until the travel, tourism, and hospitality industries, is further notice, and (ii) allow the banking and improving more slowly, underpinned initially by a microfinance sectors to continue to restructure revival of domestic demand and domestic tourism. loans until the end of 2021. While remaining Construction activity, especially real estate, below its pre-pandemic level, Cambodia’s broad housing, and property market developments, money growth was strong at 15.3 percent y/y which was booming during the pre-pandemic as of September 2021. Thanks to improved period, remains sluggish. confidence in the banking system and continued Despite a recovery of manufacturing exports capital inflows, foreign currency deposit growth, and an expansion of agricultural commodity which significantly eased during the first half exports, the trade deficit has widened of 2020, has picked up since, contributing 11.5 significantly. This was caused by rising imports percentage points of the 15.3 percentage points CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 9 EXECUTIVE SUMMARY of broad money growth in September 2021. income losses, which could potentially lead to Reflecting stronger credit demand, domestic credit an increase of poverty. Cambodia has recently growth also recovered, growing at 24.0 percent redefined the poverty line, using the most recent y/y in September 2021, but remained below its Cambodia Socio-Economic Survey for 2019-20, pre-pandemic growth rate of 27.0 percent in cost-of-basic need, and common basket approach. December 2019. The national poverty line is now Cambodian riel 10,951 per person per day. Under the new poverty The outbreak has hit Cambodia’s fiscal line, about 17.8 percent of the population is accounts. Slower revenue collection, along with identified as poor. Poverty rates vary considerably increased fiscal support to offset economic and by areas of residence. Poverty rate is the lowest social impacts of the pandemic, is expected in Phnom Penh (4.2 percent), other urban areas to worsen the deficit to 6.1 percent of GDP (12.6 percent), and the highest in rural areas (22.8 in 2021, up from 4.5 percent of GDP in 2020. percent). The widening fiscal deficit requires an increased drawdown of government deposits (fiscal Outlook reserves), which declined to 17.6 percent of GDP The economy is expected to continue to (19.7 billion riels) in September 2021 from 23.7 recover amid a rollback of COVID-19-related percent of GDP (24.9 billion riels) at the end of restrictions. Real GDP growth is projected to 2020. To mitigate the negative impacts on poor reach 4.5 percent in 2022. Over the medium term, and vulnerable households, the authorities have growth is expected to trend back to potential. extended the COVID-19 cash transfer program As the authorities have now relaxed travel until December 2021 under the program’s seventh restrictions, “reopening” the country, key sectors round, while introducing additional assistance. such as tourism, travel, hospitality, and wholesale As of October 2021, 678,459 households or and retail are starting to recover, propelling 19 percent of all households, have received the economic recovery in the medium term. In cash transfer from the government. On average, addition to the economic recovery plan that will each poor and vulnerable household (identified be introduced soon, the newly introduced Law under the IDPoor initiative) covered by the on Investment, the recently ratified Cambodia- program receives about US$45 per month. In China Free Trade Agreement and Regional addition, the government has launched a one- Comprehensive Economic Partnership, and the off social assistance cash transfer to support recently signed Cambodia-Republic of Korea non-IDPoor households affected by COVID-19. Free Trade agreement may help attract foreign As of August 2021, about 121,397 eligible non- direct investment inflows to the country in the IDPoor households countrywide had received coming years. government support. Challenges and risks Poverty continues to remain higher than pre- pandemic. The results of a High-Frequency Risks remain tilted to the downside. Despite Phone Survey of Household shows that accelerated vaccination progress, risks of employment has yet to return to pre-pandemic further disruptions remain high, given relatively levels. The negative impacts of the pandemic on high numbers of infections and mortality. The non-farm family businesses remain substantial, coronavirus continues to be unpredictable, and the caused mainly by weak consumer demand. Nearly possibility of new or existing variants of the virus half of households report having experienced spreading in the country could lead to a possible declines in income between December 2020 resurgence in new cases. A slowdown in global and March 2021. This suggests that a certain demand could hurt export-oriented sectors of the proportion of households that are negatively economy, while the tourism sector may recover affected by COVID-19 continue to suffer from even more slowly than expected, as consumers 10 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 EXECUTIVE SUMMARY may remain reluctant to travel far distances despite as the application procedures for registration of eased travel restrictions. In addition, high credit an investment project and the special procedures growth and concentration of domestic credit in for applying for a work permit and employment, the construction and real estate sector remain a remain to be enacted. In addition, investor key risk to Cambodia’s financial stability. awareness and understanding of the new law, as well as of the recently ratified Cambodia-China Cambodia is expected to graduate from least Free Trade Agreement (CCFTA) and the Regional developed country (LDC) status in the next Comprehensive Economic Partnership, and the several years. After graduating from the LDC recently signed Cambodia-Republic of Korea category, Cambodia is expected to no longer Free Trade Agreement (CKFTA), need to be benefit from LDC-specific international support heightened. measures. One of the main support measures for LDCs is preferential access to developed As economic recovery takes shape and the economies’ markets under the Generalized System pandemic subsides, it is important to start of Preferences (GSP), including “Everything But reprioritizing government fiscal intervention Arms.” Of the 15 countries granting GSPs, at to rebuild fiscal space over the medium term. least five are Cambodia’s main export markets, To this end, the ongoing public expenditure which include the United States, the European review exercise should help improve “value for Union, the United Kingdom, Canada, and Japan. money” of public expenditure going forward. To avoid depletion of government deposits, Policy options fiscal support (monetary assistance under loan To jump-start the economic recovery, it is restructuring measures) to the industries that crucial to create enabling environments, have already recovered (or show no signs of underpinning key growth drivers to recovering due to underlying structural demand accelerate. The relaxation of travel restrictions is issues) may be reconsidered. As discussed above, fundamental for a recovery of the tourism, travel, government deposits already declined by a quarter and hospitality industries that will boost job to 17.6 percent of GDP by September 2021. With creation and help propel the economy. To this end, additionally budgeted fiscal intervention in 2022, the immediate actions are required to promptly fiscal reserves will be substantially reduced further. establish clear rules and regulations pertaining Therefore, rebuilding the fiscal space needed to to new measures “living with COVID-19” under mitigate future shocks is necessary. To this end, the “new normal,” which will facilitate business, the ongoing reforms of the tax system, including investment, and tourism activities. Introducing preparation for a new revenue mobilization accommodative regulatory and fiscal measures, strategy for 2024–28, will help. leveraging the newly introduced investment law Financial system soundness remains key to to support a prompt revival of the tourism, travel, macroeconomic stability in Cambodia. Going and hospitality industries will be an important next forward, given a relatively modest recovery of step. In this regard, a close collaboration between the tourism, travel, and hospitality industries and the public and private sector will be essential. the subdued construction and real estate sector, To attract FDI inflows, taking advantage of it is necessary to continue to closely monitor improved external demand conditions, it asset quality. A more cautious approach may be is crucial to promptly introduce necessary adopted to loans against property, which grew regulations and arrangements to smoothly quickly during the pre-pandemic period. The implement the newly introduced Law on country has a relatively large number of banks and Investment. A sub-decree on the implementation microfinance institutions, a challenge in ensuring of the new law, including several necessary that the financial system is well supervised and (downstream) regulations and arrangements, such regulated. It is crucial to continue to improve CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 11 EXECUTIVE SUMMARY confidence in the banking system as deposits pandemic—a decline of 12 percent from the remained the dominant source (67 percent in baseline. The present value of lifetime earnings 2020) of funds for banks. Looking ahead, the lost because of the COVID-19 pandemic is central bank is committed to staying vigilant and US$31 billion. It is therefore recommended standing ready to introduce appropriate supportive that teachers and administrators return to the measures. In the post-COVID-19 period, the all-important task of educating students. They withdrawal of any policy supports would be well need to act quickly to prevent dropouts, assess communicated and on a gradual basis to achieve a student learning, and implement new techniques balance between growth and stability. for learning recovery to get students back on track. Meanwhile, Cambodia needs to retain and Further investment in human capital will strengthen its remote learning infrastructure, make an important contribution to improving which can be used to instruct students not in productivity and competitiveness. Findings class on any given day under the new rotational discussed in the special focus section below reveal system. In the future, when all students can return that Cambodia suffers substantial learning and to school every day of the week, remote learning earning losses. Under the intermediate scenario, channels can supplement in-person learning. today’s cohort of students in Cambodia will attain Beyond that, reopening teacher colleges provides 1.5 fewer learning-adjusted years of schooling an opportunity to strengthen teacher training than the pre-pandemic baseline of 6.8 years and preparation for both in-person and remote because of school closures. The average student teaching. As the situation stabilizes in the months in today’s cohort can expect to lose US$738 and years ahead, Cambodia needs to “build back in purchasing power parity in annual earnings better,” improving its education system for the because of lost learning during the COVID-19 benefit of students and the economy. 12 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 EXECUTIVE SUMMARY FIGURE ES.1. CAMBODIA’S RECENT DEVELOPMENTS AT A GLANCE Real growth is expected to gradually recover… …goods (excluding gold) exports accelerated Real growth (percent) (YTD, y/y, percent change) Historical average (5 years) 10�0 Exports GDP growth 30 Historical average (5 years) 8�0 proj� 25 6�0 20 4�0 15 2�0 10 5 0�0 0 -2�0 -5 -4�0 -10 Approved projects financed by FDI, however, … gross international reserves marginally remained subdued… declined (YTD, y/y percent change) (YTD, y/y percent change) 40 YTD, y/y percent change y/y percent change, RHS 35 Historical average (5 years) Historical average (5 years) 250 30 200 25 150 20 15 100 10 50 5 0 0 -50 -5 -100 -10 Jul-20 Jul-21 Jul-19 Jan-21 Jan-20 Sep-20 Sep-19 Sep-21 May-20 May-21 May-19 Mar-20 Mar-21 Mar-19 Nov-20 Nov-19 Jul-17 Jul-18 Jul-19 Jul-20 Jul-21 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Sep-19 Sep-21 Sep-17 Sep-18 Sep-20 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 May-17 May-18 May-20 May-21 May-19 Nov-17 Nov-18 Nov-19 Nov-20 Broad money (M2) growth remained …credit growth is trending upward as demand accommodative… has strengthened Broad money liabilities (y/y percent change) (y/y percent change) 60 60 Credit to the private secor (y/y) M2 y/y, percent change Historical average (5 years) 50 50 Historical average (5 years) 40 40 30 30 20 20 10 10 0 - May-20 May-21 May-18 May-19 May-16 May-17 May-14 May-15 May-13 Sep-20 Sep-18 Sep-19 Sep-16 Sep-17 Sep-14 Sep-15 Jan-20 Jan-21 Sep-13 Sep-21 Jan-18 Jan-19 Jan-16 Jan-17 Jan-14 Jan-15 Jan-13 May-13 May-14 May-15 May-17 May-18 May-19 May-20 May-21 May-16 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 Sources: Cambodian authorities; World Bank staff estimates and projections. Note: e = estimates; proj./p = projection; YTD = year-to-date; y/y = year-on-year; RHS = right-hand scale.. CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 13 Section I Recent Economic Developments and Outlook Recent Economic Developments and Outlook Recent Economic Developments and Outlook Recent developments Outbreaks lingered but showed signs of abating Living with COVID-19 Local outbreaks, which were raging in the Cambodia is now adopting “living with past several months caused by the more COVID-19” measures under a “new normal.” transmissible Delta variant, are showing Infection rates and mortality receded after more signs of abating. While remaining high, both daily than 80 percent of the total population received infections and fatalities have receded (figure 1). two doses of coronavirus vaccine. The authorities As of November 29, 2021, there were 120,112 have relaxed travel restrictions while continuing cases and 2,935 deaths. Once infections have been to strictly follow protective health measures. reduced, the restrictions are being phased out and Traditional growth drivers, especially the the country will rely more on intensive testing- garment, travel goods, footwear, and bicycle tracing-isolation and international screening/ manufacturing industries, as well as agriculture, quarantining to prevent or detect further outbreaks continue to underpin the economic recovery. early enough to control them. This approach has The electrical, electronic, and vehicle parts proved very effective and has been implemented. manufacturing industries are slowly emerging, It has allowed domestic economic activity to while the agroprocessing industries, in particular resume relatively early while suffering the smaller food and wood processing, and furniture, are economic costs of border controls. picking up. The service sector, especially the Nevertheless, the outbreak, which lingered travel, tourism, hospitality, wholesale, and retail during the second and third quarters of industries, is slowly recovering, underpinned 2021, slowed the recovery, especially of the initially by a revival of domestic demand and tourism, wholesale, and retail sectors. The domestic tourism. Construction activity, especially important travel and tourism sector, which was real estate, housing, and property market estimated to have provided about 2 million jobs developments, which was booming during the and contributed a quarter of GDP during the pre- pre-pandemic period, remains sluggish. pandemic period, virtually collapsed. Job losses Figure 1: After resurging, coronavirus cases have Figure 2: Vaccinations accelerated declined Share of people vaccinated against (new cases as of November 29, 2021) COVID-19 (November 28, 2021) Share of people vaccinated against COVID-19, Nov 28, 2021 Our World in Data Alternative definitions of a full vaccination, e.g. having been infected with SARS-CoV-2 and having 1 dose of a 2-dose protocol, are ignored to maximize comparability between countries. Share of people fully vaccinated against COVID-19 Share of people only partly vaccinated against COVID-19 New cases Cambodia All time United Arab Emirates 98% Singapore 93% Cuba 90% Portugal 89% Chile 88% China 85% 28 Nov 2021 Cambodia 83% 83% 1,500 South Korea New cases: 23 Spain Canada 82% 80% 7-day avg: 31 Japan 79% Uruguay 79% Italy 78% 1,000 France 77% Brazil 77% United Kingdom 75% Vietnam 71% Germany 71% United States 69% 500 Thailand 68% Iran 67% Turkey 66% Mexico 59% India 56% World 54% 0 Indonesia 50% Russia 45% Jun 18 Sep 14 Dec 11 Mar 9 Jun 5 Sep 1 Nov 28 Philippines 36% Pakistan 36% Bangladesh 35% South Africa 28% Egypt 23% Kenya 8�2% Ethiopia 6% Nigeria 2�9% New cases 7-day average 0% 20% 40% 60% 80% Source: Official data collated by Our World in Data. This data is only available for countries which report the breakdown of doses administered by first and second doses in absolute numbers. CC BY Source: Johns Hopkins University Center for Systems Science and Source: Our World in Data. Engineering (JHU CSSE) COVID-19 Data. 16 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Recent Economic Developments and Outlook have been magnified by an increased number of permission was granted to reopen all but primary migrant workers who have returned home from schools on September 15, 2021. The early abroad. reopening of schools in September was made possible by the high vaccination rates among 83.0 percent of the population has been fully Cambodian teachers and youth aged 12 to 17. vaccinated In Phnom Penh, 11,000 teachers and faculty While relying on social distancing measures (98 percent of the total), and 200,000 students to quell the current outbreak, the government aged 12 to 17 were vaccinated, of which 10,000 has succeeded in rolling out its vaccination teachers and faculty (95 percent of total) and program. According to the authorities, as of 140,000 students (70 percent of total) have been end-November 2021, 13.3 million people, or 83.0 allowed to enter 228 public and private schools.2 percent of total population of 16 million, have Only vaccinated students and teachers are allowed been fully vaccinated with at least two doses, to return to schools. which includes 1.7 million people aged 12 to 17 The COVID-19 pandemic has caused and 1.8 million aged 6 to 11. The authorities have tremendous damage to education systems in been administering third doses of COVID-19 the world. Hundreds of millions of students— vaccine. Vaccination of five-year-old children including those in Cambodia—have lost at least a started November 1, 2021. The authorities are full year of school. The Special Focus section of planning to complete the vaccination program this Update details the impact of the COVID-19 before the end of 2021, about six months ahead pandemic on learning and earning in Cambodia of their COVID-19 vaccination masterplan. As and the tradeoffs policymakers face in managing it. of end-October 2021, Cambodia received about 37 million doses, most of them Sinovac and The region is witnessing a reversal of Sinopharm vaccines purchased from and donated fortune by China. Of the total Chinese vaccines, more The coronavirus pandemic affects economic than 70 percent was purchased. activity within a country directly through Cambodia is one of best-performing countries loss of earnings and illness, and indirectly for Coronavirus vaccinations. As of November by provoking restrictive public health 28, 2021, the country was ranked second in Asia measures.3 The shock also affects the rest of the and seventh in the world for the total share of world and hence a specific country by affecting fully and partly vaccinated people in its total its international trade, FDI, remittances, and population (figure 2). financial flows. The region is witnessing a reversal of fortune. In 2020, many East Asia and Pacific The authorities have fully “reopened” (EAP) countries had successfully contained the Cambodia for business spread of the disease and domestic economic Since November 2021, Cambodia has relaxed activity had revived, but the recession in the its stringent restrictions on domestic and industrial world, which was still struggling with international mobility, reopening the economy the disease, dampened exports. Now in 2021, it is as the country is getting ready to launch a 2021–23 the region which is being hit by the disease, while economic recovery plan. The required quarantine the industrial world is on the path to recovery. period for those who have been fully vaccinated An uneven recovery in the EAP region is has been fully lifted since November 15, 2021.1 now facing a setback. China’s economy is Unvaccinated travelers, however, continue to projected to grow 8.5 percent in 2021, though require a 14-day quarantine period. growth momentum has eased. Overall regional All schools have been allowed to reopen growth is projected at 7.5 percent, reflecting the since November 1, 2021. This happened after scale of China’s economy. The rest of the region 1 Decision dated November 14, 2021, on required quarantine period for travelers who have been fully vaccinated, Ministry of Health. 2 See Prakas by Phnom Penh Municipality dated September 14, 2021. 3 World Bank 2021a. CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 17 Recent Economic Developments and Outlook Box 1: Global economic developments and outlook1, 2 After moderating since the second quarter, incoming data suggest that global activity has stabilized. The global composite Purchasing Managers’ Index (PMI) increased to 54.5 in October from 53.3 in September, reflecting a significant improvement in the services index (figure B.1.1). High-frequency indicators, however, point to a decline in global trade growth at the start of the fourth quarter amid persistent supply disruptions. After peaking in the first half of August, global COVID-19 case counts decreased. Since mid-October, however, global new daily cases have started to rise again, driven by a rapid upsurge across Europe, prompting tighter pandemic restrictions in many economies. Global financing conditions remain broadly accommodative, with equity valuations in advanced economies climbing to all-time highs. In emerging market and developing economies (EMDEs), however, financing conditions continue to tighten amid persistent price pressures, and EMDE sovereign credit spreads remain elevated. Portfolio outflows from EMDEs accelerated in late October and early November amid growing concerns about inflation, growth, and high levels of government debt. Brent crude oil prices reached a seven-year high of US$86/barrel at the end of October (figure B.1.2). However, after reaching all-time highs, European natural gas prices and Australian coal prices declined sharply at the start of November. According to the June 2021 Global Economic Prospects report, global growth is set to reach 5.6 percent in 2021, fueled by a robust rebound in some major economies. However, this recovery is uneven and largely reflects sharp rebounds in some major economies amid a highly unequal vaccine rollout, supply bottlenecks, and financial tightening. In many EMDEs, COVID-19 flareups, inflationary pressures, and diminished macroeconomic support are weighing on growth. Aggregate EMDE growth is forecast to reach 6 percent in 2021; however, excluding China, growth is projected to be a more modest 4.4 percent this year. In contrast to advanced economies, many EMDEs will not return to pre-pandemic trends over the forecast horizon. The near-term global outlook is subject to considerable risks. The continued spread of COVID-19 amid unequal distribution of vaccines across countries opens the door to new, more virulent variants. In addition, continued supply bottlenecks could lead to additional disruptions to trade and contribute to further inflation surprises, increasing the risk that inflation expectations become unanchored. Meanwhile, sharp increases in debt levels have heightened the risk of financial stress. The pandemic is likely to have durable impact through multiple channels, including lower investment, weak confidence, and erosion of human capital. The long-term damage related to the pandemic will be particularly severe in economies that suffered most from extended outbreaks of COVID-19 and the collapse of global tourism and trade and those that suffered financial crises. Figure B1.1. Manufacturing and services PMI Figure B1.2. Commodity prices (Index, nominal term, 2010 = 100) Index, 50+ = expansion 140 Energy 60 Manufacturing Services Agriculture 120 Metals&Minerals 50 100 80 40 60 30 40 20 20 Oct-19 Apr-20 Oct-20 Apr-21 Oct-21 Oct-18 Oct-19 Oct-20 Oct-21 Source: Haver Analytics; World Bank. Source: Haver Analytics; World Bank. Note: Last observation is October 2021. Note: Last observation is October 2021. 1 This box was prepared by Ekaterine Vashakmadze, Prospects Group. 2 This box draws on the World Bank’s June 2021 Global Economic Prospects (GEP) report. The updated global forecasts will be published in the January 2022 GEP. 18 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Recent Economic Developments and Outlook is anticipated to grow by 2.5 percent, compared and awareness of the graduation process and its to 4.4 percent forecast in the April 2021 EAP impacts. Economic Update, with significant heterogeneity At the next Triennial Review in 2024, if across countries (see also box 1 on regional and Cambodia meets graduation criteria for global economic developments). While China, the second time, the CDP will review Indonesia, and Vietnam have already surpassed country statements, impact assessments, pre-pandemic levels of output, Malaysia and its vulnerability profile, and more. The CDP Mongolia will only do so in 2022, and the submits to the Economic and Social Council Philippines, Thailand, and many Pacific Island (ECOSOC) a recommendation for graduation or economies will remain below pre-pandemic levels defers to the next Triennial Review. If graduation is of output even in 2023. As a result, employment has declined, poverty will persist, and inequality recommended, the ECOSOC endorses the CDP’s is increasing across several dimensions. The recommendation, the General Assembly takes regional employment rate dropped by about 2 note, and confirms the length of the preparatory percentage points on average between 2019 and period which will begin. When a country 2020. As many as 24 million people will not be graduates from the LDC category, it no longer able to escape poverty in 2021 in developing EAP, benefits from LDC-specific international support excluding China, because of COVID-19. While measures.5 One of the main support measures all households have suffered, poorer ones were of LDCs is preferential access to markets under more likely to lose income, sell off productive the Generalized System of Preferences (GSP). assets, suffer food insecurity, and lose schooling Under the GSP, LDCs are basically given duty- for children. free, quota-free (DFQF) market access.6 Of the 15 countries granting GSP preferences,7 at least Cambodia is graduating from least five are Cambodia’s main exports markets and developed country (LDC) status in the next include the United States, the European Union, several years the United Kingdom, Canada, and Japan. After Despite negative impacts of the pandemic, graduation, Cambodia is expected to lose its this year, Cambodia met all three criteria—per preferential market access currently provided capita gross national income, a human assets index, under DFQF. The country is accelerating its free and an economic and environmental vulnerability trade negotiations with many major countries, index—for least developed country graduation for the majority of which are its current main export the first time in the Triennial Review conducted partners and some of which are its potential export by the UN Committee for Development Policy partners. So far, the country has signed free trade (CDP).4 Five countries met the eligibility criteria agreements with China and the Republic of Korea for the first time: Cambodia, Comoros, Djibouti, and plan to negotiate free trade agreements with Senegal, and Zambia. The CDP is concerned Japan, the United Kingdom, India, the Eurasian about the risk that some of these countries may Economic Union, and others. fail to reach the graduation thresholds at the Thanks to improved external demand 2024 triennial review, in particular owing to the conditions, goods exports accelerated impacts of COVID-19. It calls upon relevant United Nations entities to carefully monitor the Cambodia’s merchandise exports have development of these countries, including in accelerated further, fueled by improved relation to the least developed country criteria external demand conditions. During the first and the new supplementary graduation indicators. nine months of 2021, goods (excluding gold) The CDP strongly encourages these countries and exports rose to US$12.6 billion, growing at 23.0 their international partners to build knowledge percent year on year (y/y), almost reaching its pre- 4 Committee for Development Policy Report on the twenty-third session (22–26 February 2021) Economic and Social Council Official Records, 2021 Supplement No. 13. While the Committee recommends the Lao People’s Democratic Republic for graduation, it defers its decision on a possible recommendation for graduation for Myanmar until the 2024 triennial review. 5 See https://www.un.org/ldcportal/impacts-of-graduation/. 6 See https://www.customs.go.jp/english/c-answer_e/imtsukan/1501_e.htm. 7 See Generalized System of Preferences, UNCTAD. https://unctad.org/topic/trade-agreements/generalized-system-of-preferences. CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 19 Recent Economic Developments and Outlook pandemic growth rate of 25.5 percent in January orders. The GMAC added that there are some 2020 (figure 3). The top four manufacturing increases in orders compared to 2020. In this exports are garment, travel goods, footwear, and connection, imports of fabric mainly used for bicycle products, covering 67.5 percent of total garment production has surged, growing at 25.1 merchandize exports. Despite its accelerated percent y/y during the first nine months of 2021. growth rate of 6.8 percent y/y, garment exports The GMAC, however, stressed that there have no longer account for the majority of goods been additional cost pressures in terms of (i) exports but rather 45.9 percent of total goods contribution to the pension fund, (ii) a possible exports, amounting to US$5.82 billion during increase in healthcare contribution to cover the first nine months of 2021. Exports of travel COVID-19 treatments for workers, and (iii) goods surpassed those of footwear products day-to-day expenses on occupational health and and became the second-largest item, accounting safety measures such as test kits, disinfectant, and for US$1.04 billion (8.2 percent of total), with masks, despite a marginal minimum wage increase a whopping y/y rise of 47.3 percent. Exports to US$194 a month in 2022, up from US$192 a of footwear products is third, reaching US$1.0 month in 2021. billion (7.9 percent of total) or a 17.9 percent y/y Manufacturing exports to the United States, increase. The fourth-largest manufacturing export the largest exports market, surged product is bicycles, which amount to US$0.47 billion, with a y/y growth rate of 24.1 percent. Goods exports to the United States, The fifth- and sixth- largest exported products Cambodia’s largest exports market, surged, are agricultural commodities, and milled rice rising by 31.9 percent y/y in September 2021 and rubber, amounting to US$285 million and to US$ 3.4 billion (figure 4), despite expiration US$266 million, respectively. The newly emerging of legal authorization for the GSP program on manufactured products, which include electrical, December 31, 2020, pending U.S. congressional approval.8 The United States continued to capture electronic, vehicle parts, and cables combined, a rapidly rising share of Cambodia’s garment, reached US$412 million, with a 23.1 percent y/y travel, and footwear (GTF) exports, reaching 42.8 increase. percent of total in the first nine months of 2021, The Garment Manufacturers Association up from 36.7 percent in 2020 and 31.9 percent in Cambodia (GMAC) confirmed that most in 2019. Cambodia’s exports to the U.S. market factories reported that they have enough contributed 11.6 percentage points of the 12 Figure 3: Cambodia’s goods exports1 recovered Figure 4: Contribution of major markets to (contribution to export growth, percentage GTF exports growth point) (percentage point) Others Clothing 40 ROW Japan Shoes Bags United Kingdom European Union Bicycle Woods United States Y/Y % change) Electricals Agricultural products 30 30 Textiles Total 20 20 10 10 0 0 -10 -10 -20 -20 May-19 May-20 May-21 Nov-19 Nov-20 Mar-19 Mar-20 Mar-21 Sep-21 Sep-19 Jan-19 Sep-20 Jan-20 Jan-21 Jul-19 Jul-20 Jul-21 Source: Cambodian authorities. Source: Cambodian authorities. Note: 1. Goods (excluding gold) exports. Note: RoW = rest of the world. 8 See https://www.cbp.gov/trade/priority-issues/trade-agreements/special-trade-legislation/generalized-system-preferences. 20 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Recent Economic Developments and Outlook percentage points of GTF exports growth during or 83.6 percent y/y decline.10 As foreign investor the first nine months of 2021. appetite to invest in the garment sector has returned, fueled by rising external demand, the Goods exports to the European Union (EU), largest approved FDI project value of US$146 Cambodia’s second-largest exports market, went to garment manufacturing. Of the US$314 also accelerated, growing at 15.0 percent to US$2.2 billion in the first nine months of 2021. million approved FDI project value going to non- This happened despite the impact of the partial garment manufacturing, pulp and paper, solar withdrawal of the EU’s Everything But Arms energy, vehicle parts and electronics, travel goods, preferential treatment, effective August 12, 2020 and footwear industries received US$75.6 million, (affecting approximately 20 percent of Cambodia’s US$53.9 million, US$41.2 million, US$28.1 million, exports to the EU).9 This is also in stark contrast to and US$22.9 million, respectively. Approved FDI a 35 percent decline in GTF exports to the EU in projects going to agriculture reached only US$32 2020. The EU market accounted for 27.9 percent million during the first nine months, down from of Cambodia’s total GTF exports, contributing US$100 million during the same period last year. 4.1 percentage points of the total 12.0 percentage China, which includes mainland China; Hong points of GTF export growth in the first nine Kong Special Administrative Region (SAR), months of 2021. Contributions of exports to China; Macau SAR, China; and Taiwan, China, Japan, the United Kingdom (UK), and the rest of remains the largest foreign investor in Cambodia, the world (ROW) to GTF exports growth during accounting for about 90 percent of total approved the same period were 0.4 percentage points, -1.2 FDI project value. Approved investment projects, percentage points, and -2.9 percentage points, except those from China, which may have respectively. proven to be the exception, given China’s higher risk appetite and the close ties between China Likely due to travel restrictions, approved and Cambodia, have declined, likely caused by FDI remained weak tightened international travel restrictions and Approved FDI project value investing in continued high costs of logistics and energy. the real sector remained relatively weak in Unlike during the pre-pandemic period, foreign 2021, likely due to travel restrictions. During investors’ appetite for investing in the real estate, the first nine months of 2021, approved (fixed tourism, retail, and wholesale sectors seems to asset) FDI project value totaled US$538 million have virtually ceased. Table 1: Progress on Business Registration Reforms Approval time Ministry License/permit/registration Before After Ministry of Industry, Science, Registration of small and 15 working days 3 working days Technology, and Innovation medium-sized enterprises Ministry of Tourism Licensing for travel agencies, 28 working days 7 working days travel agents, restaurants, and hotels Ministry of Posts and Licensing for information and 30 working days 7 working days Telecommunications communications technology, and posts Non-Bank Financial Services Licensing for real estate 30 working days 7 working days Authority businesses and pawnshops Source: Announcement on Phase 2 of the Business Registration System on Information Technology Platform, Ministry of Economy and Finance, September 1, 2021; https://www.registrationservices.gov.kh/wp-content/uploads/2021/08/Press-Release-for-OBR-Phase-II- Khmer-and-English.pdf. 9 For more details, please see https://trade.ec.europa.eu/doclib/press/index.cfm?id=2113. 10 The approved FDI project value excludes that of special economic zones (and project expansion). CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 21 Recent Economic Developments and Outlook Good progress is achieved under business Large property development project activity registration reforms remained subdued In June 2020, the authorities successfully Major commercial and residential development created a single Information Technology projects continued to be impacted by the platform for business registration, which pandemic, despite a small segment of the integrates regulatory requirements by the housing market—low and affordable residential Ministry of Commerce, the General Department property—remains resilient. Excess supply may of Taxation of the Ministry of Economy have resulted in reduced foreign investor appetite and Finance, and the Ministry of Labor and for investing in property development projects. Vocational Training under Phase 1 of the During the first nine months of 2021, approved Business Registration System. Phase 2, which was construction permit value and area declined by introduced in September 2021, includes more 24.8 percent and 17.1 percent y/y, respectively classes of business licenses and permits available (figure 5). The value of cement imports mainly for application on the platform to be issued by used for the construction industry contracted more agencies, which include the Ministry of by 29.6 percent in the first nine months of 2021 Industry, Science, Technology and Innovation; (figure 6). The value of steel imports barely grew, the Ministry of Tourism; the Ministry of Posts rising at 2.3 percent y/y after contracting by and Telecommunication; and the Non-Bank 34.5 percent in 2020. The value of construction Financial Services Authority. As a result, approval equipment imports accelerated to 35.0 percent times for most types of business registration has y/y, after contracting by 7.6 percent in 2020. The been substantially reduced from 15 to 30 days to construction industry has been impacted by the only 3 to 7 days (see table 1).11 pandemic, which creates widespread uncertainty. As a result, large property development projects As businesses are formalized, they will be were delayed and suspended. able to have better access to finance and to government technical support and fiscal An unprecedented property development and incentives, while being able to establish backward real estate boom during the pre-pandemic linkages with the formal exports sector. The period created excess supply. Thanks to benefits of being formal for businesses may also Cambodia’s liberal trade and investment policy, include enforceable commercial contracts, legal fueled by the prospect of a high investment return protections, access to healthcare and pension from tourism activities backed by a casino industry systems, and more. From the government side, in Sihanoukville, external demand for the country’s as businesses are registered, they will ultimately commercial and residential property ballooned, regularly pay taxes. contributing to the pre-pandemic construction Figure 5: Approved construction permits Figure 6: Imports of basic construction materials declined and equipment remained subdued (YTD, y/y percent change) (YTD, y/y percent change) 300 Construction equipment Cement 250 140 Steel 200 Square meter Amount 120 100 150 80 100 60 40 50 20 0 0 -20 -50 -40 -100 -60 Jul-19 Jul-20 Jul-21 Jan-19 Jan-20 Jan-21 Sep-21 May-19 Sep-20 May-20 Sep-19 May-21 May-19 May-20 May-21 Mar-19 Mar-21 Mar-20 Mar-19 Mar-21 Nov-19 Jan-19 Jul-19 Sep-19 Nov-19 Jan-20 Jul-20 Sep-20 Nov-20 Jan-21 Jul-21 Nov-20 Sep-21 Mar-20 Source: Cambodian authorities. Source: Cambodian authorities. 11 See https://www.registrationservices.gov.kh/. 22 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Recent Economic Developments and Outlook Box 2: Cambodia: Summary of Investment Incentives under the Law on Investment A new investment law was introduced in October 2021. Article 26: Qualified Investment Project (QIP) which is an investment project that has received a registration certificate from the Council for the Development of Cambodia (CDC) or the Capital/Provincial Investment Sub-Committee has the following two basic incentive options: Option 1 Option 2 • Corporate income tax (CIT) exemption from 3 to 9 • Eligible to deduct capital expenditure through special years, depending on the sector and investment activities depreciation as stated in the tax provisions in force. from the time of first income. Sectors and investment • Eligible for up to 200 percent deductible on other activities, as well as the period of CIT exemption, shall specific expenses for up to 9 years. Sectors and be determined in the Law on Finance Management investment activities, and specific expenses as well as and/or a sub-decree. After the expiration of the deductible periods shall be determined in the Law on CIT exemption period, QIP shall be eligible to pay Financial Management and/or a sub-decree. progressive CIT proportion relative to the total amount • Receive exemption for prepayment of corporate of CIT payable as follows: income tax for a particular period of time according to  25 percent for the first 2 years the sector and investment activity as defined in the Law  50 percent for the next 2 years on Financial management and/or a sub-decree.  75 percent for the last 2 years. • Receive exemption for prepayment on corporate income tax during corporate income tax exemption. Article 27: QIP is eligible to receive the following additional incentives: • Receive a minimum tax exemption by having an independent audit report. • Receive export tax exemption, except as otherwise provided in other laws and regulations. • Export QIPs and supporting industry QIPs that support export QIPs are eligible to import construction materials, construction equipment, production equipment, and production inputs with tariffs, special tax, and value-added tax being the burden of the state. • Domestic QIPs are eligible to import construction materials, construction equipment, and production equipment with customs duties, special tax, and value-added tax being the burden of the state. Incentives for production inputs shall be set out in the Law on Financial Management and/or a sub-decree. • Receive value-added tax exemption for the purchase of locally produced inputs for QIP. • Receive a deduction at the rate of 150 percent from the tax base for any of the following activities: - Research, development, and innovation - Provision of vocational and skills training to Cambodian workers - Construction of housing, canteens, restaurants, nurseries, and other health facilities for workers - Modernizing of machinery to serve the production chains - Provision of means of transportation for workers to travel to and from factories. • Receive corporate income tax exemption for the expansion of a QIP, which shall be determined by a subdecree. Article 28. Certain areas and investment activities that have high potential to contribute to national economic development may receive other special incentives set forth in the Law on Financial Management. Article 12. The One-Stop-Service mechanism reviews investment project registration applications. If the proposed investment project is not on the Negative List, as set out separately in a sub-decree, a certificate of registration will be issued within no more than 20 business days. Article 20. Investors’ intellectual property is protected under the laws and regulations on intellectual property of the Kingdom of Cambodia. Article 22. The CDC or the Capital/Provincial Investment Sub-Committee shall issue a certificate of investor status to the person involved in the investment project at the request of the investor to use for the application for a long-term temporary residence permit, work permit, and employment card, and for other necessary purposes. Article 34. Within 30 days after receiving the written request, disputes can be resolved through a mediation mechanism of the CDC or of the Capital/Provincial Investment Sub-Committee; if not successful, disputes are resolved through (i) the national arbitration or international arbitration agreed by the parties, or (ii) a competent court of the Kingdom of Cambodia. Source: Cambodia’s Law on Investment (2021). CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 23 Recent Economic Developments and Outlook and real estate boom, financed in large part by FDI. Penh via an (under construction) expressway, When the pandemic hit, together with lockdowns experienced a rapid construction boom during and tightened international travel restrictions the pre-pandemic period. Sihanoukville received including a required 14-day quarantine period US$4.2 billion of approved construction projects among others, external demand was interrupted, in 2019. As a result, the province was transformed and most the FDI-financed property investment, into an investment boomtown, backed by a casino especially in high-rise and large-scale development industry. When the authorities stopped issuing projects in major urban centers such as Phnom new casino permits in August 2019, the boom Penh and Sihanoukville, were suspended. slowed and the province received only US$1.5 billion of approved construction projects in 2020. In Phnom Penh, the real estate industry indicated As the pandemic hit, the construction boom that completions of development projects continue eased further. In the first nine months of 2021, to outpace take-up.12 All segments of the property approved construction permit value reached only market have been hit hard by the pandemic. In the US$594 million (figure 7). third quarter of 2021, the condominium market experienced a subdued quarter, with two-thirds of Unless the relaxation of travel restrictions and the anticipated completions being delayed into the the prospect of a high investment return for new year. There was a mixture of issues, which holding property in Cambodia can help restore include construction supply chain disruption, external demand for the country’s large-scale workforce availability crunches, and in some cases and capital-intensive commercial and residential cash flow stresses brought about by slower than property building developments, the construction expected sales. In this regard, property developers and real estate boom that the country witnessed were advised to pay attention to domestic demand during the pre-pandemic period, may not return and their cash flow. Imbalances continued in the anytime soon, given Cambodia’s relatively small office and retail segments of the property market. domestic market. After the moratorium on the new casino permits in 2019, a Law on Management As stock vacancy rises, reductions in rental rates of Commercial Gambling was promulgated in for the commercial segment grew. November 2020, the first article of which aims The international gateway, the seaside to boost the economy, bolster tourism, collect province of Sihanoukville, where the country’s revenue, and establish social safety and security. largest seaport and an international airport are In October 2021, the authorities issued a Prakas located, connecting to the capital city of Phnom (regulation) on legal and regulatory requirements Figure 7: Approved construction permits for Figure 8: International arrivals and Angkor Sihanoukville province eased revenue collapsed (US$ million) (YTD, y/y, percent change) 900 Approved project value (US$ million) Total Siem Reap Entrance revenue 100 800 80 700 60 40 600 20 500 0 400 -20 300 -40 -60 200 -80 100 -100 - -120 Jul-20 Jul-21 Jul-19 Apr-19 Jun-20 Apr-21 Jun-21 Jun-19 Jan-20 Jan-21 Oct-18 Jan-19 Oct-17 Oct-19 Apr-20 Apr-18 Oct-20 Feb-20 Mar-20 Feb-21 Jul-17 Jan-18 Apr-19 Jul-21 Sep-19 Oct-19 Aug-20 Sep-20 Oct-20 May-21 Aug-21 Jul-18 Feb-19 Sep-21 Jan-19 Apr-20 Mar-19 Aug-19 May-20 Jul-19 Jan-20 Apr-21 Mar-21 Jul-20 Jan-21 May-19 Nov-19 Nov-20 Dec-19 Dec-20 Source: Cambodian authorities. Source: Cambodian authorities. 12 Phnom Penh Market Update Q3, 2021, CBRE; https://images.cbre.com.kh/2021/10/Cambodia_Phnom-Penh_Figures_2021_Q3-1.pdf. 24 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Recent Economic Developments and Outlook for obtaining, transferring, and extending casino as demand increases. While the agriculture and gambling licenses.13 sector has been benefiting from increased labor availability and additional investment, agricultural Despite less favorable weather conditions, commodity price volatility, especially of non-rice agricultural production marginally increased agricultural products produced for the domestic As of August 2021, wet season rice cultivation market, remains a critical constraint, as do higher reached 2.6 million hectares, or a 5.4 percent electricity and logistics costs. year-on-year increase.14 Harvesting of (short- In addition, exports of heavy and relatively duration varieties) wet season rice has accelerated, cheap cargo such as milled rice continued to producing a total of 1.4 million metric tons, or be affected by high shipping costs, caused by 54 percent of last year’s total wet season paddy temporary container shortages. According to rice production. In 2021, wet season rice yield the Cambodia Rice Federation, high shipping costs increased to 4.1 metric tons per hectare, up from largely affected rice exports destined to Europe. 3.5 metric tons per hectare in 2020. During the first nine months of 2021, milled rice In 2020, total rice production only marginally exports to the EU market declined by nearly 40 expanded, reaching 10.9 million metric tons or a percent, compared to the same period last year. 0.5 percent increase.15 Last year’s rice cultivation Total milled rice exports amounted to 410,698 faced less favorable weather conditions, with metric tons or a 15.9 percent decline. While the the late arrival of rainfalls, midseason droughts, trade safeguard measures imposed by the EU on and end-season floods. The cultivated (and Cambodian rice will end in January 2022,16 saving harvested) area marginally increased, reaching 3.4 rice exporters €125 per ton, the high ocean freight million hectares or a 2.3 percent increase in 2020, rate of €250 per metric ton will likely continue in despite efforts to increase the cultivated area of the next 12 months or so. wet season rice. The rice production yield for A newly introduced investment law is 2020 was flat at 3.3 metric tons per hectare. Rice expected to boost export competitiveness remains Cambodia’s major crop, and value added of crop production accounted for 57.4 percent of A new investment law, which was introduced the country’s agricultural GDP in 2020. in October 2021, expects to help attract more FDI. In addition to a similar corporate income Non-rice agricultural production during the tax (CIT) exemption (tax holiday) from three to first seven months of 2021 was mixed. Rubber nine years offered under a previous law, the new production expanded by 16 percent y/y in July law provides an additional six-year period of 2021. During the first eight months of 2021, CIT reduction. After the expiration of the tax cassava and maize exports shrank to 0.4 million holiday period, the Qualified Investment Project metric tons (a 4.6 percent y/y decline) and 0.1 (QIP) shall be eligible to pay a progressive CIT million metric tons (a 21.3 percent y/y decline), proportion relative to the total amount of CIT respectively. Exports of cashew nuts, however, payable during the following six-year period as surged, reaching almost 1 million metric tons follows: (i) 25 percent for the first two years; (ii) 50 or a 340.6 percent y/y increase. Production and percent for the next two years; and (iii) 75 percent export of fresh bananas and mangos have been for the last two years (see box 2). In addition, the recently boosted by a new export market, China. new Law on Investment may also provide other In addition, the Cambodia-China Free Trade special incentives for certain areas and investment Agreement, which is expected to go into effect next activities that have high potential to contribute to year, will likely help boost Cambodia’s agricultural national economic development. production and exports, especially to the Chinese market. The country’s agricultural production (and The new Law on Investment may also exports) has been expanding during the pandemic help improve worker productivity, given the 13 Prakas no. 002, date October 21, 2021. 14 Monthly report for August 2021, Ministry of Agriculture, Forestry and Fisheries. 15 Annual report for 2020, Ministry of Agriculture, Forestry and Fisheries. 16 The European Union imposed safeguard measures on rice from Cambodia. On January 18, 2019, the European Union reinstated the 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. CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 25 Recent Economic Developments and Outlook incentives it offers on the provision of skills The agreement that would cover a market of 2.2 training, housing, nurseries, health facilities, and billion people, or almost 30 percent of the world’s transportation services to workers. Incentives population, with a combined GDP of US$26.2 provided to research, development, innovation, trillion or about 30 percent of global GDP, and and machinery modernization may also promote accounts for nearly 28 percent of global trade.17 new technology adoption and transfers. The The objectives of RCEP18 are to (a) establish a provision of value-added tax exemption for the modern, comprehensive, high-quality, and mutually purchase of locally produced inputs for QIP may beneficial economic partnership framework; promote backward linkages between the FDI-led (b) progressively liberalize and facilitate trade in manufacturing exports sector with the domestic goods among the Parties through, among others, small and medium-sized enterprise sector. progressive elimination of tariff and non-tariff Cambodian parliament ratified CCTFA and barriers on all trade in goods among the Parties; RCEP (c) progressively liberalize trade in services among the Parties; and (d) create a liberal, facilitative, and In October 2021, the Cambodian parliament competitive investment environment in the region. ratified the Cambodia-China Free Trade Agreement (CCFTA) and the Regional Cambodia signed a free trade agreement Comprehensive Economic Partnership with the Republic of Korea (RCEP), which aim to increase the trade of The Cambodia-Republic of Korea Free Trade goods by reducing and eliminating tariffs and Agreement (CKFTA) was signed in October non-tariff barriers. The CCFTA is Cambodia’s 2021. According to the Ministry of Commerce, first comprehensive bilateral FTA and China’s first the CKFTA was initiated during the visit of the bilateral FTA with a member of the Association Korean President to Cambodia in March 2019. of Southeast Asian Nations (ASEAN). It has There were 12 rounds of negotiations since the been reported that the CCFTA covers more than two countries started to negotiate the CKFTA in 10,800 tariff lines for Cambodia and about 9,530 November 2019, but no details have been made tariff lines for China. The CCFTA goes beyond public. According to the Ministry of Commerce, what was offered under the ASEAN-China FTA, the CKFTA consists of 10 chapter and 131 covering an additional 340 tariff lines (4 percent articles. The CKFTA will go into effect 60 days of the total), which includes mostly chapters after the two countries inform each other once it 1 to 10 of Cambodia’s ASEAN Harmonized has been ratified. Under the CKFTA, Cambodia Tariff Nomenclature (AHTN), ranging from live expects to boost its exports of garment, footwear, animals/animal products to meat, fish, and cereals. and travel goods, vehicle parts, and electronics, as After the CCFTA takes effect, about 98 percent well as agricultural commodities including rubber of China’s tariff lines will immediately go to zero to the Republic of Korea. tariff rates. Of the 340 commodities, 95 percent will be untaxed. Even before the effectiveness of Tourism activity is slowly picking up, thanks the CCTFA, Cambodian agricultural commodity to the relaxation of travel restrictions exports to the Chinese market are surging. During The relaxation of travel restrictions started in the first nine months of 2021, milled rice exports October 2021 has underpinned a slow recovery destined for the Chinese market rose by 37.7 of the travel and tourism industry. According to percent, reaching 0.2 million metric tons or half the Ministry of Tourism, about 800,000 domestic of total milled rice exports, thanks to China’s tourists visited various tourist attraction sites import quota which currently stands at 0.4 million across the country during the Pchum Ben holiday metric tons a year. period covering October 2–7, 2021. However, The RCEP agreement is an unprecedented positive impacts of the relaxation on international mega-regional trading arrangement that arrivals remain to be seen. To revive the tourism comprises a diverse mix of developed, developing, sector, the authorities in October 2021 introduced and least developed economies of the region. the Siem Reap tourism development masterplan 17 https://rcepsec.org/wp-content/uploads/2020/11/RCEP-Summit-4-Joint-Leaders-Statement-Min-Dec-on-India-2.pdf. 18 http://fta.mofcom.gov.cn/rcep/rceppdf/d1z_en.pdf. 26 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Recent Economic Developments and Outlook for 2021–35. A US$150 million public investment 17.4 percent, 39.1 percent, respectively (figure 9). project to develop the physical infrastructure, Imports of electronics also increased, growing at consisting of 38 roads with a total length of 108 3.6 percent. Imports of durables goods such as kilometers in Siem Reap is expected to be ready passenger cars, motorcycles, tractors, and trucks by the end of this year. improved, growing at 1.0 percent, 12.3 percent, 53.9 percent, and 66.6 percent, respectively. Negative impacts of the pandemic on the travel and tourism industry have a lasting effect. Similarly, imports of gasoline, diesel, and natural The prospects for scarring from COVID-19 are gas have accelerated, growing at 15.7 percent, 35 substantial for Cambodia’s tourism sector. After percent, and 26.9 percent, respectively. the collapse of international arrivals, large- to Inflation edged up as oil prices increased medium-sized hotels and resorts, especially those located at Cambodia’s largest tourist attraction site, Headline inflation has picked up, caused the Angkor Temple Complex in Siem Reap, were out largely by rising prices of petroleum products. of business. Subsequently, prolonged lockdowns Inflation rose to 3.4 percent y/y in August 2021, up and travel restrictions triggered by the longest and from 2.4 percent during the same period last year most severe local outbreak have decimated small and 2.9 percent at the end of 2020. Elevated prices businesses, which include guest houses, restaurants, of gasoline and diesel (and motorcycles) resulted gift shops, and entertainment services. International in a rising transport subindex, which increased by arrivals plummeted to 113,000, or a 90.6 percent 9.6 percent, up from a negative 4.1 percent during y/y decline during the first seven months of 2021 the same period last year. The contributions of (figure 8). Similarly, entrance fees collected from the the transport subindex to inflation therefore rose Angkor Temple Complex plunged to US$236,000, by 1 percentage point, reaching 0.7 percentage or a 98.7 percent y/y decline. points, up from a negative 0.3 percentage points (figure 10). The contribution of the housing (and While remaining weak, domestic utilities) subindex to inflation also increased to consumption marginally picked up 0.3 percentage points, up from 0.1 percentage Domestic consumption is gradually picking points. The contribution of the subindex of all up, underpinning the economic recovery, food items, which accounts for 43.2 percent of given that consumption accounts for about Cambodia’s consumer price index (CPI) basket 70 percent of GDP. In the first nine months remained unchanged at 1.9 percent as elevated of 2021, imports of consumer goods such as prices of meat, fish, vegetable, and dairy products garments, foodstuffs, cooking oil, and sugar were offset by depressed prices of cereals, in accelerated, growing at 26.5 percent, 24.2 percent, particular rice. Figure 9: Imports of consumer goods slowly Figure 10: Inflation edged up recovered (Contributions to 12-month inflation (y/y, percent change) (percent) Foodstuff Softdrink Garment Others 140 8 Transport sub-index Gasoline Diesel Housing & utilities sub-index 120 Food sub-index 100 6 Headline inflation (y/y) 80 60 4 40 20 2 0 -20 0 -40 -60 -2 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Jul-21 Source: Cambodian authorities. Source: Cambodian authorities. CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 27 Recent Economic Developments and Outlook In Cambodia’s main import partners, price Cambodia’s external imbalances increased pressures also marginally increased (figure 11). significantly this year. The trade deficit rose Inflation in the United States quickly rose to as imports surged, growing at 53.5 percent 5.4 percent y/y in August 2021, up from 1.3 y/y during the first nine months of 2021. In percent during the same period last year. Given addition, services exports have been impacted the economy is highly dollarized and the riel has by the collapse of tourism receipts. As a result, been pegged to the dollar, rising inflation in the the current account deficit has substantially United States will likely lead to rising domestic deteriorated since the beginning of the year (see price pressures, which often results in “imported” the balance-of-payments section below). To this inflation. Similarly, the East Asia and Pacific end, the central bank’s open market operations (EAP) region has less to fear from inflation at continued to underpin exchange rate stability, home than inflationary pressures abroad.19 While which in turn has helped anchor domestic retail output gaps remain wide in most countries in prices denominated in local currency (see the the region, suggesting a lack of demand pressure monetary section below). on consumer prices (and the currencies of Thanks to the central bank’s open market countries in the region have not depreciated operations, nominal values of the Cambodian significantly), faster recovery and inflation in riel vis-à-vis the U.S. dollar remained broadly industrial countries could induce higher interest within the targeted ±2 percent range (figure 12). rates there, and premature financial tightening The exchange rate marginally depreciated to 4,074 in the lagging EAP region. Price pressures were riels per U.S. dollar in October 2021, compared to also found in Singapore and Thailand. Inflation in 4,060 riel per U.S. dollar during the same period Vietnam and China, however, remained subdued last year. The riel versus Thai baht exchange rate in August 2021. The risk of inflation is low in the marginally appreciated, reaching 122 riel per baht, near term for most countries in the region. Long- down from 132 riel per baht. The Riel versus term inflation expectations in general remain Chinese yuan exchange rate, however, depreciated well-anchored at levels within central bank target to 636 riel per yuan, up from 606 riel per yuan. ranges. The riel versus Vietnamese dong exchange rate The exchange rate has been under increased remained broadly unchanged at 0.17 riel per dong. pressures caused by external imbalances Broadly stable exchange rates of the riel versus the U.S. dollar and a number of Cambodia’s main Rising external imbalances have put the trading partners in the region have helped anchor exchange rate under increased pressure. prices of Cambodia’s main imported products. Figure 11: Inflation of Cambodia’s main Figure 12: The nominal exchange rate was broadly importing partners stable, within a ±2 percent range (y/y percent change) (riel per U.S. dollar, y/y percent change) United States Cambodia 2�5 Vietnam Thailand Singapore China 2 10 1�5 8 1 6 0�5 0 4 -0�5 2 -1 0 -1�5 -2 -2 -2�5 -4 May-14 Aug-12 Oct-13 Feb-16 Jun-18 May-21 Oct-20 Mar-13 Aug-19 Jan-12 Jul-15 Apr-17 Mar-20 Dec-14 Sep-16 Nov-17 Jan-19 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jul-21 Jul-14 Jul-15 Jul-13 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Source: Haver Analytics. Source: Cambodian authorities. 19 World Bank 2021. 28 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Recent Economic Developments and Outlook The current account deficit deteriorated as 2020, and it seems to be an appropriate time to the trade deficit widened invest in it. Fabric imports, which have been a leading indicator for garment exports, have been In 2021, Cambodia’s current account deficit fueled by rising demand for garment products as deteriorated quickly as the trade deficit external conditions improved. In the first nine widened. The trade deficit has substantially months of 2021, imports of fabric rose to US$3.5 widened, largely caused by a surge in imports, billion or a 25.1 percent increase. while goods (including gold) exports eased. In addition, the balance of payments has been In addition, the country’s service exports have further impacted by the collapse of tourism been decimated by the collapse of tourism receipts, which has devastated the country’s receipts. In 2020, service transactions were services exports. abruptly interrupted by the pandemic. As a result, for the first time in many years, the net exports During the first nine months of 2021, goods of services registered a deficit of US$123 million (including gold) exports marginally eased, in 2020, down from a surplus of US$2.8 billion reaching US$12.7 billion or 3.5 percent in 2019. Service exports declined by 68 percent y/y decline. Goods (including gold) imports, in 2020, compared to an increase of 11.6 percent however, skyrocketed, reaching US$20.6 billion in 2019, caused primarily by a sharp decline in or a 53.5 percent increase. The trade deficit has travel exports, which contracted by 78.6 percent therefore significantly widened. Rising imports y/y.21 During the first half of 2021, net exports of a few major items, in particular gold20 used as of services registered a negative US$700 million, savings asset, and fabric used as inputs for garment according to the central bank’s balance-of- production and exports, have been mainly behind payments data. Given the widening trade deficit the surge in imports. Gold imports shot up to and the continued large negative net service US$4.0 billion in the first nine months of 2021, exports, the current account deficit is projected to a more than tenfold increase, as gold traders peak at 26.9 percent of GDP in 2021 (figure 13), increasingly hedged against volatility caused by up from 8.2 percent of GDP in 2020. While the pandemic. Gold has been a traditional hedge the deficit is projected to continue to be largely against inflation, which is creeping up. Gold prices financed by capital and FDI inflows, international have remained favorable since the second half of reserves have marginally declined, with increased Figure 13: The current account deficit deteriorated Figure 14: Gross international reserves eased quickly (US$ billion) (percent of GDP) Gross international reserves Secondary income Primary income 25 y/y percent change, RHS 40 Services Goods Current account balance 35 30�0 20 30 20�0 25 10�0 15 20 15 0�0 10 10 -10�0 5 -20�0 5 0 -30�0 -5 0 -10 -40�0 May-17 May-18 May-19 May-20 May-21 Jan-17 Jan-18 Sep-21 Sep-17 Sep-18 Jan-19 Sep-19 Jan-20 Sep-20 Jan-21 2018 2019 2020e 2021p Source: World Bank staff estimates, and projections based on the Source: Cambodian authorities. data from the Cambodian authorities. Note: RHS = right-hand scale. Note: e = estimates; p = projection. 20 A US$3 billion surge in gold exports helped boost goods exports in 2020, but a (projected) surge in gold imports of US$4.0 billion in 2021 worsens this year’s trade (and current account) deficit. 21 Financial Stability Review for 2020, the National Bank of Cambodia. CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 29 Recent Economic Developments and Outlook central bank open market operations. Gross financial burden for individuals and businesses, international reserves declined only marginally to banks and financial institutions have been allowed US$19.3 billion (about ten months of imports) in to conduct loan restructuring since 2020. By mid- September 2021 (figure 14), down from US$21.2 2021, 367,239 borrower accounts (11.1 percent billion at the end of 2020. of total borrower accounts) amounting to US$5.5 billion (13.6 percent of total outstanding credits) Monetary policy easing continued were restructured. Given the high uncertainty The central bank’s monetary policy easing regarding the strength of economic recovery, continued to provide liquidity to banks and especially after the community outbreak in the financial institutions to support economic second and third quarters of 2021, the NBC is recovery. In September 2021, the National Bank committed to staying vigilant and standing ready of Cambodia (NBC), Cambodia’s central bank, to introduce more supportive measures that are introduced a Marginal Lending Facility (MLF), in line with government policies, while preserving offering riel-denominated overnight loans that financial stability.24 can be extended up to five days, using negotiable The central bank’s exchange rate policy is certificates of deposit as collateral.22 The MLF one of its main policy instruments. The main was established to provide short-term liquidity objective of the policy is to achieve price stability. demanded by the banking sector and to foster Continuing to implement the managed floating the development of the interbank market, while regime, the central bank intervenes in the foreign encouraging the use of local currency in the highly exchange market to maintain the exchange rate dollarized economy. The central bank under its in accordance with the determined objective. third-round monetary easing measures introduced The exchange rate has been under increased in May 2021 decided, among others, to (i) maintain pressures due to rising external imbalances. In a reserve requirement ratio at 7 percent for both response, the central bank has intervened in the riel and U.S. dollar deposits and borrowings until foreign exchange market by conducting open further notice; and (ii) allow the banking and market operations. To this end, the central bank microfinance sectors to continue to restructure sold US$50 million in September and US$100 loans until the end of 2021.23 To help relieve the million in October 2021.25 During the first half Figure 15: Broad money (M2) growth recovered Figure 16: Domestic credit growth improved Contribution to broad money growth (y/y percent change) (percentage point) Foreing currency deposits (other deposits) 40 Credit growth Deposit growth 34 Transferable deposits Currency in circulation 35 29 M2 y/y, percent change 30 24 25 19 20 14 15 9 10 4 5 -1 0 May-17 May-18 May-19 May-20 May-21 Sep-21 Sep-17 Sep-18 Jan-17 Jan-18 Sep-19 Sep-20 Jan-19 Jan-20 Jan-21 May-19 May-20 Nov-19 Nov-20 May-21 Mar-19 Mar-20 Mar-21 Sep-21 Sep-19 Sep-20 Jan-19 Jan-20 Jan-21 Jul-19 Jul-20 Jul-21 Source: Cambodian authorities. Source: Cambodian authorities. 22 See https://www.nbc.org.kh/download_files/news_and_events/announ_kh/IntroducingMLF.pdf. 23 See May 21, 2021, announcement on policy easing measures (third round) by the National Bank of Cambodia. 24 National Bank of Cambodia, 2020 Financial Stability Review, May 2021. See https://www.nbc.org.kh/download_files/publication/fsr_eng/Final_ FSR_2020_English.pdf. 25 Announcements dated September 6 and 21, and October 18 and 27, 2021, The National Bank of Cambodia. See https://www.nbc.org.kh/news_and_ events/announcements_info.php?id=431. 30 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Recent Economic Developments and Outlook of 2021, net sales of U.S. dollars was US$48.5 past, because the exchange rate has been under million, while net purchases of U.S. dollars was pressure, caused by the widening of Cambodia’s US$26.7 million.26 In addition, the central bank trade and current account deficits, while the continues to absorb liquidity from the market by economy is highly dollarized. issuing negotiable certificates of deposit in local Credit growth recovered, while deposit currency and U.S. dollars under liquidity-providing growth improved collateralized operations (LPCO). Domestic credit growth recovered, thanks Broad money growth partly recovered to improved demand. Domestic credit grew at Thanks to improved confidence in the 24.0 percent y/y in September 2021 (figure 16), banking system and continued capital compared to 27.0 percent in December 2019 (and inflows, broad money (M2) growth recovered. a five-year historical average of 31 percent). The While remaining below the pre-pandemic level, credit-to-GDP ratio, therefore, increased further Cambodia’s M2 growth was strong at 15.3 percent to 154.9 percent in September 2021, up from y/y as of September 2021 (figure 15). Foreign 136.0 percent in December 2020. Thanks to an currency deposit growth, which significantly overall recovery of demand for credits, credit eased during the first half of 2020, has picked up expansion was across the board. According to since, mainly contributing to the partial recovery the data on credit granted by banks classified of broad money growth. Of the 15.3 percent by industry, domestic credit financing the broad money growth as of September 2020, the construction and real estate sector started to pick contribution of foreign currency deposits (and up in the last quarter of 2020 and has accelerated other deposits) accounted for 11.5 percentage since, reflecting a renewed appetite for domestic points, while transferable deposits contributed investment in the construction and real estate 2.6 percentage points. The contribution of sector (figure 17). After hitting a 2.5-year low, (local) currency in circulation to broad money dropping to 6.9 percentage points in August growth eased, declining to 1.2 percentage points 2020, the contribution of the construction, real in September 2021, down from 2.9 percentage estate, and mortgage sectors to domestic credit points in December 2019. This decline is due growth once again accelerated, accounting for to the fact that the central bank cannot inject as 10.7 percentage points in May 2021, marginally much local currency into circulation as it did in the below its peak of 11 percentage points before Figure 17: The contribution of construction to Figure 18: The general government overall credit growth accelerated fiscal deficit widened (percentage point) (% of GDP) Other 35 Total revenue (and grants) Total expenditure 35 Wholesale & retail Construction, real estate & mortgage 30 Overall balance 30 Hotels and restaurants Manufacturing 25 25 Agriculture 20 20 15 15 10 10 5 5 0 0 -5 -5 May-17 May-18 May-19 May-21 May-20 Aug-17 Nov-17 Aug-18 Nov-18 Aug-19 Nov-19 Aug-20 Nov-20 Feb-17 Feb-18 Feb-19 Feb-20 Feb-21 -10 2018 2019 2020 pre 2021p 2022p Source: Cambodian authorities. Source: Cambodian authorities. Note: pre = preliminary; p = projection. 26 Semiannual reform for 2021, the National Bank of Cambodia. See https://www.nbc.org.kh/download_files/publication/annual_rep_kh/Semi_Annual_ Report_2021_Final.pdf. CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 31 Recent Economic Developments and Outlook the pandemic. As of May 2021, there was US$11 decreased from 17.7 percent to 14.8 percent. billion (or 33 percent of total) in outstanding For microfinance institutions, the ROE and credit provided the construction, real estate, and ROA decreased to 1.9 percent and 4.5 percent, mortgage sectors. The contributions of lending down from 2.2 percent and 6.3 percent in 2019, to wholesale and retail, agriculture, hotels and respectively. restaurants, and manufacturing to credit growth In 2020, the nonperforming loan (NPL) ratio rose to 6.5 percentage points, 2 percentage points, for agriculture was the highest, registering at 1.5 percentage points, and 1.2 percentage points, 5.6 percent, down from 7.4 percent in 2019. respectively, in May 2021, up from 4.5 percentage The NPL ratio for the manufacturing sector points, 1.9 percentage points, 0.5 percentage was second, at 4.2 percent. The NPL ratios points, and 0.6 percentage points, respectively, in December 2020, reflecting an across-the- for the construction, real estate, and mortgage board expansion of credit financing all business sectors were surprisingly low, accounting for 2.1 activities. percent, 1 percent, and 1.1 percent, respectively, despite high credit growth and a concentration Deposit growth also picked up, likely of domestic credit in these sectors. The NPL indicating increased confidence in the ratio for the hotel and restaurant sector was 2.4 banking system, with continued capital percent. The NPL ratios of other sectors, such inflows expanding at 15.6 percent y/y in as the retail and wholesale trades, remained below September 2021, after hitting its lowest growth 2 percent. In the first half of 2021, the reported rate of 7.3 percent in April 2020.27 overall nonperforming loan ratios remained low at The latest financial stability review indicated 2.5 percent and 2.0 percent for the banking sector that the financial and banking sector and microfinance sectors, respectively.29 However, remained resilient given the continued loan restructuring process offered by banks and microfinance institutions, The central bank’s Financial Stability Review the reported nonperforming loan ratios may not for 2020 indicated that the financial and correctly reflect the level of debt distress facing banking sector remained resilient due to its the banking and microfinance system. strong capital and liquidity positions, thanks to implementation of microprudential regulations Interest rates of U.S. dollar-denominated in the past decades coupled with the intervention loans and deposits remained broadly stable measures by the NBC that have built up the as of May 2021. The (weighted average of) resilience of the banking system.28 In 2020, the U.S. dollar-denominated term deposit rates capital adequacy ratios of banks, Microfinance marginally increased to 3.3 percent per year in Deposit-Taking Institutions (MDIs), and May 2021, compared to 3.2 percent in December microfinance institutions stood at 23.7 percent, 2020. During the same period, the U.S. dollar- 19.8 percent, and 38.9 percent, respectively, which denominated term loan rates remained unaffected were higher than the capital requirement of 15 at 9.1 percent a year. Due to Cambodia’s highly percent. Similarly, the liquidity coverage ratios dollarized economy, the central bank cannot of banks and MDIs stood at 162.5 percent and influence interest rates, especially those of U.S. 240.4 percent, respectively, which were also higher dollar-denominated loans and deposits.30 than the liquidity benchmark of 100 percent. In The pandemic substantially impacted jobs addition, the profitability of the banking system and poverty remained sustainable, with a marginal decline in return on assets (ROA) and return on equity The COVID-19 pandemic continues to have (ROE) for banks to 1.7 percent and 8.7 percent in an impact on economic activities across the 2020, compared to 1.9 percent and 9.8 percent in country. The High-Frequency Phone Survey 2019, respectively. Similarly, MDIs recorded the of Households shows that employment has yet same ROA of 2.9 percent, although their ROE to return to pre-pandemic levels (see Box 3 for 27 Due to the highly dollarized economy, the central bank’s broad money (M2) data reported in the monetary survey is incomplete as it includes only local currency (not U.S. dollars) in circulation. The surge of imports, therefore, does not necessarily reflect a decline in M2 recorded in the survey. 28 Financial Stability Review for 2020, the National Bank of Cambodia, May 2021. 29 National Bank of Cambodia 2021. 30 However, the central bank introduced a lending rate cap at 18 percent per year in March 2017. See Prakas number B7-017-109 PK dated March 13, 2017; https://www.nbc.org.kh/download_files/legislation/prakas_eng/Prakas-on-Interest-Rate-Cap-Eng.pdf. 32 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Recent Economic Developments and Outlook the detailed findings of the survey). The negative the same period last year. Direct revenue (direct impacts of the COVID-19 pandemic on non-farm tax), which accounts for 38 percent of total family businesses remain substantial due to weak domestic revenue and which has been hit hardest, consumer demand. Nearly half of households contracted by about 12 percent, caused by falling experienced declines in income between profits and incomes of businesses (and workers). December 2020 and March 2021. The authorities Some businesses, such as those that served the have extended the COVID-19 cash transfer services sector, especially the travel, tourism program for poor and vulnerable households and hospitality industries, have gone bankrupt. (identified under the IDPoor initiative) until Indirect revenue, which accounts for about half December 2021 under the program’s seventh of domestic revenue, declined by 7 percent round,31 while introducing additional assistance. due mainly to the decline in excises and special In early June 2020, when the program began, taxes collected from imported goods. Despite its there were only 560,000 eligible households. Since initial recovery, consumption remained subdued, then, the total number of households receiving compared to the pre-pandemic period. Domestic the cash transfer rose to more than 640,000 as demand for imported goods, in partly durable of October 202032, and to 710,929 as of January goods such as passage cars and motorcycles, and 2021. As of October 2021, 678,459 households construction materials such as steel and cement, or 19 percent of all households, received the declined. Similarly, international trade and non- cash transfer from the government. On average, tax revenues, which accounted for 10 percent and each poor and vulnerable household covered by 8 percent of total domestic revenue, respectively, the program receives about US$45 per month. shrank by 4.2 percent and 20 percent, respectively. In addition, the government has launched a one- Domestic revenue is expected to reach about 94 off social assistance cash transfer to support percent of total (estimated) collection in 2020. non-IDPoor households affected by COVID-19. Despite increased fiscal intervention, As of August 2021, about 121,397 eligible non- government expenditure remained contained IDPoor households countrywide had received government support. The COVID-19 relief cash During the first eight months of 2021, transfer program including the one-off social government expenditure declined by 2.2 assistance cash transfer helps mitigate some of percent y/y. To save budgetary resources to the negative impacts on poor and vulnerable finance necessary public health expenditures to households, but its coverage remains relatively fight the spread of the coronavirus, compensation narrow. Cambodia has recently redefined the of employees (the public sector wage), which poverty line, using the most recent Cambodia rose quickly during the pre-pandemic period, has Socio-Economic Survey for 2019-20, cost-of- been frozen (since the 2021 budget). Spending basic need, and common basket approach. The on goods and services (non-wage) accelerated, national poverty line is now Cambodian riel increasing by 10.5 percent, caused mainly by 10,951 per person per day. Under the new poverty the increase in social assistance and benefits line, about 17.8 percent of the population is including the cash transfer, and health supplies identified as poor. Poverty rates vary considerably and equipment in response to the resurgence of by areas of residence. Poverty rate is the lowest COVID-19 cases. The government has adopted in Phnom Penh (4.2 percent), other urban areas additional fiscal support, projected to increase to (12.6 percent), and the highest in rural areas (22.8 4.9 percent of GDP or US$1,454 million in 2021, percent). up from 2.5 percent of GDP or US$829 million in 2020, driven mainly by spending on COVID-19 Subdued domestic economic activity caused prevention and treatment, which accounts for revenue collection to ease further 2.9 percent of GDP in 2021 (table 2).33 During the first eight months of 2021, domestic While total capital spending remains revenue declined by 3 percent, compared to moderate, domestically financed capital 31 See Decision on cash transfer for the seventh round dated October 11, 2021, Ministry of Economy Finance; https://nspc.gov.kh/Images/Decision_0001_ 2021_10_20_14_09_13.pdf. 32 Presentation by the Ministry of Social Affairs, Veterans and Youth Rehabilitation on October 22, 2020. 33 MEF presentation on budget framework for 2022 to the Parliament, August 17, 2021. CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 33 Recent Economic Developments and Outlook spending surged, rising by 42.2 percent during estimated) 28.4 percent of GDP in 2020, when the first eight months as the government boosted the pandemic first hit the country. In contrast, public investment in physical infrastructure. Since domestic revenue (including grants) is expected 2020, domestically financed capital spending has to significantly decline to 20.7 percent of GDP in exceeded externally financed capital spending. 2021, down from 23.9 percent of GDP in 2020 A widening fiscal deficit as the pandemic when impacts of the pandemic on revenue were reversed years of extraordinary revenue lessened by ballooned profit taxes for 2019, which gains were collected in April 2020. Impacts of the pandemic have reversed years of extraordinary Despite efforts to contain expenditure, the performance gains in revenue collection in overall fiscal deficit has widened, caused by Cambodia. The (projected) revenue-to-GDP ratio weak revenue collection. Still, the deficit is of 20.7 percent in 2021 is similar to that in 2016 expected to be fully financed by the government’s (see Annex 1: Selected Indicators). current savings/fiscal reserves (without resorting to domestic bank financing) and external To finance the gap between revenue collection borrowing. In 2021, the overall fiscal deficit is and financing requirements, the authorities expected to reach 6.1 percent of GDP, up from continue to tap into their current savings (estimated) 4.5 percent of GDP in 2020 (figure 18). (fiscal reserves) and to draw down government In 2021, total expenditure is projected to be deposits in the banking system. While contained at 26.7 percent of GDP, down from (an remaining solid, government deposits declined Table 2: Government fiscal intervention (percent of GDP) 2020 2021 2022 Interventions Description Full-Year Plan Disbursed Plan Estimate Plan Public Health and Social Intervention - Health Masterplan Scaling up health response by increasing prevention and - Outbreak Prevention detection facilities, clinical management and treatment as 0.39 0.11 0.10 2.48 1.00 and Treatment well as coordination and supporting system Wage subsidy and skill Providing partial wage subsidies of $40 per month and training techincal/soft skills training for furloughed workers in 0.25 0.23 0.20 0.20 0.20 the tourism and garment industries Cash for work Providing jobs in rural areas through construction, upgrade, and maintenance of rural roads, drainage and 0.39 0.36 0.54 0.54 0.33 small-scale irrigation Cash Transfer Providing monthly cash grants to poor and vulnerable individuals that are registered in the government’s 1.16 1.12 0.67 1.12 0.94 IDPoor database Food support During Providing food support to local people during - - - 0.03 - Lockdown lockdown period Economic Intervention Financing through ARDB Providing low-interest loans for working capital and investment in agricultural sector through capital 0.19 0.18 - - - injections to Agricultural and Rural Development Bank Co-Financing through Co-financing with commercial banks by providing low- SME Bank interest loans for working capital and investment in 6 0.19 0.18 - - - targeted SME sectors through newly established SME bank Credit Guarantee Fund Providing capital to establish the Credit Guarantee Corporation of Cambodia which helps bear risk- 0.77 0.73 - - - sharing with businesses SME Financing Facility Reserving contingent funds to provide any necessary 1.16 0.11 0.90 0.50 - financing to SME sector Cash Transfer Providing monthly cash grants to poor and vulnerable individuals that are registered in the government’s - - 0.84 IDPoor database Food support During Providing food support to local people during - - 0.08 Lockdown lockdown period Total Intervention Package 4.50 3.02 2.41 4.87 3.39 Source: Cambodian authorities. 34 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Recent Economic Developments and Outlook Box 3: Impacts of COVID-19 on households—results from the High-Frequency Phone Survey of Households1 The High-Frequency Phone Survey of Households reveals that employment has yet to return to pre-pandemic levels. With 69 percent of respondents working in March 2021, employment remained relatively unchanged compared to December 2020, but below its pre-pandemic level when 82 percent of respondents were working. The share of respondents who stopped working since the last round and the share of respondents who had been out of work since the last interview also remained unchanged between December 2020 and March 2021 (figure B3.1), suggesting that employment outcomes have not worsened further. Seasonality in farming is the primary reason respondents stopped working. The negative impacts of the COVID-19 pandemic on non-farm family businesses remain substantial, with weak consumer demand driving the losses in business revenues. In March 2021, one in two households operating non-farm businesses still reported having made “less” or “no revenues” relative to the previous month (figure B3.2). Although there was a significant reduction in the share of non-farm business households reporting having made “less” or “no revenues” since May 2020 (81 percent), there was no further reduction since October 2020 (54 percent). Meanwhile, the share of households reporting their business revenues “stayed the same” tripled between May 2020 and March 2021. While widespread reductions in household income continue, there are signs of improvements, with fewer households experiencing declines. In March 2021, 45 percent of households experienced declines in income between December 2020 and March 2021. This compares to 48 percent of households that experienced declines between October and December, 51 percent between August and October, 63 percent between May and August, and 83 percent between the pre-COVID-19 outbreak and May. Since the launch of the nationwide COVID-19 relief transfer program in June 2020, there has been a marked increase in the share of IDPoor households receiving social assistance from the government, mostly in the form of cash transfers. By March 2021, 95 percent of eligible IDPoor households had received relief cash transfers and most of them had received nine installments with an average of US$366. The relief transfer program has contributed to the economic well-being of beneficiary households. Around 38 percent of IDPoor households receiving the relief cash transfers report that the program has been “extremely important” for their household’s economic well-being, while another 40 percent report that it has been “very important.” As a result, the relief program has had an impact on the economic well-being of beneficiary households and made “a complete difference” for 42 percent of these households. Figure B3.1. Respondents (LSMS+) or Changes in sales revenues in non-farm Figure B3.2.  household’s main earner (IDPoor) household businesses relative to last working in last 7 days month 7 4 4 5 5 5 5 4 8 5 10 7 18 20 21 19 20 16 10 10 12 15 11 11 5 4 3 31 40 37 29 10 13 9 12 46 42 44 6 5 4 2 8 46 1 73 % % 78 82 81 65 65 64 68 67 65 61 52 58 62 46 48 48 40 8 3 3 4 2 4 5 3 R1 R2 R3 R4 R5 R2 R3 R4 R5 R1 R2 R3 R4 R5 R2 R3 R4 R5 LSMS+ IDPoor LSMS+ IDPoor Out of work since last round Stopped working since last round Currently working (changed job since last round) Currently working (same job since last round) No revenue Less The same Higher Source: High-Frequency Phone Survey of Households in Source: High-Frequency Phone Survey of Households in Cambodia. Cambodia. Note: R=round; LSMS+ = the Living Standards Note: R=round; LSMS+ = the Living Standards Measurement Measurement Study – Plus. Study – Plus. Note: 1. Karamba et al. (2021), “The Socioeconomic Impacts of COVID-19 on Households in Cambodia: Results from the High High-Frequency Phone Survey of Household Round 5 (01-21 March 2021),” Phnom Penh, Cambodia; or https://www.worldbank.org/en/country/cambodia/brief/monitoring- the-impact-of-covid-19-on-households-in-cambodia. CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 35 Recent Economic Developments and Outlook to 17.6 percent of GDP (or 19.7 trillion riels) by The preliminary result of the Debt Sustainability September 2021, down from 23.7 percent of GDP Analysis conducted by the authorities in 2020 (or 24.9 trillion riels) at the end of 2020. During shows that despite the Cambodian economy the past two decades, Cambodia first experienced being impacted by the spread of COVID-19, a prolonged decline in government deposits during Cambodia’s public debt situation continues to 2009–11, when the authorities introduced a fiscal remain “sustainable” and at “low risk” of debt stimulus to mitigate the negative impacts of the distress. All the key debt indicators in 2021 are 2008–09 global financial crisis by boosting public well below the thresholds, of which the main expenditures, which rose to 23.0 percent of GDP debt indicator, the Present Value of Public and in 2011, up from 16.1 percent of GDP in 2008. Publicly Guaranteed Debt to GDP, is at 25.1 Cambodia has recently redefined the poverty line, percent compared to the 40 percent threshold. using the most recent Cambodia Socio-Economic The weighted average grant element remained Survey for 2019-20, cost-of-basic need, and relatively high—51.6 percent in 2019 and 46.5 common basket approach. The national poverty percent in 2020—while weighted average interest line is now Cambodian riel 10,951 per person per rates were 0.81 percent in 2019 and 0.9 percent in day. Under the new poverty line, about 17.8 percent 2020. Weighted average maturities are 28.5 years of the population is identified as poor. Poverty rates in 2019 and 26.3 years in 2020. In 2020, external vary considerably by areas of residence. Poverty borrowing was mainly for the public infrastructure rate is the lowest in Phnom Penh (4.2 percent), sector, which accounted for 62.6 percent, while other urban areas (12.6 percent), and the highest in the remaining 37.4 percent was for other priority rural areas (22.8 percent). sectors. The authorities’ success in domestic revenue Cambodia’s largest official creditor is China. mobilization under its Public Financial Total debt owed to China reached US$3.9 billion, Management Reform Program (PFMRP) or 43.0 percent of total debt stock by mid-2021. more than a decade before the pandemic resulted In recent years, Cambodia has grown increasingly in a rapid increase in revenue collection. Several dependent on Chinese loans for public investment years after the PFMRP was introduced in late and Chinese FDI for private investment. U.S. 2004, the authorities’ cash position at the national dollar-denominated debt remained the largest, treasury reversed from a chronic cash shortage to accounting for 42.7 percent of total debt stock, a cash surplus in the form of government deposits followed by Special Drawing Right (SDR)- (fiscal reserves), which had been increasing since. denominated debt, at 23.8 percent. Although The revenue-to-GDP ratio more than doubled, China is Cambodia’s top creditor, the country’s rising to 27.0 percent of GDP in 2019, up from public external debt denominated in Chinese yuan 12.3 percent of GDP in 2005. covered only 14.7 percent of total debt stock. The domestic debt market is being established. Despite rising public debt, risk of debt Cambodia is planning to issue local currency distress remains low government securities soon. This will help Cambodia’s public debt-to-GDP ratio gradually diversify financing sources with a shift reached 36.0 percent of GDP, amounting to toward public domestic debt, while promoting US$9.12 billion in outstanding debt by mid- domestic savings. It also helps de-dollarize the 2021.34 As impacts of the pandemic continue, economy. Cambodia has become a lower-middle- the gap between revenue collection and financing income economy. Concessional borrowing is, requirements is widening. To partly finance the therefore, shrinking. widening gap, the country’s public debt, which The draft 2022 budget supports continued consists solely of external debt, is rising. According fiscal expansion to the authorities’ debt sustainability analysis, risk of debt distress, however, remains low, due largely The (draft) 2022 budget, approved by the to the authorities’ borrowing principle of only cabinet in October 2021, is characterized by contracting external debt on concessional terms. continued fiscal expansion.35 Expenditure is 34 Cambodia Public Debt Statistical Bulletin, Volume 12, June 2021. 35 Summary of the draft 2022 budget dated October 22, 2021, Ministry of Economy and Finance. 36 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Recent Economic Developments and Outlook targeted to increase by 8.4 percent y/y, to reach Going forward, lifting the required quarantine 27.9 percent of GDP, compared to 27.7 percent period in effect since November 15, 2021, will of GDP in the 2021 budget, of which current help attract foreign investors and tourists to expenditure increases by 11.2 percent, reaching Cambodia. The economy is therefore expected 16.7 percent of GDP, compared to 16.2 percent to continue to recover amid a rollback of of GDP in the 2021 budget. Budgeted capital COVID-19-related restrictions. Real growth is spending, however, remains largely contained, projected to reach 4.5 percent in 2022. Over the marginally increasing by 4.5 percent. As a percent medium term, growth is expected to trend back of GDP, budgeted capital spending declines to to potential as a number of key sectors, which 11.1 percent of GDP in the 2022 draft budget, include tourism, travel, hospitality, wholesale, and down from 11.5 percent of GDP in the 2021 retail, as well as construction and real estate, may budget. Thanks to improved revenue collection start recovering, propelling a speedy recovery. targeted under the draft 2022 budget, a narrower The new investment law expects to help further overall fiscal deficit is budgeted (at 7.1 percent of attract FDI, while promoting backward linkages GDP in the draft 2022 budget, down from 9.1 with domestic investment, supporting FDI- percent of GDP in the 2021 budget). led manufacturing exports. Under Cambodia’s economic recovery plan, continued investment The 2022 budget also aims at implementing climate and doing business reforms by leveraging Cambodia’s economic recovery plan, which of digital technologies are expected to help is expected to be introduced soon. Under strengthen competitiveness. the government’s Forth Rectangular Strategy within the context of the lingering COVID-19 In addition to the economic recovery plan, outbreak, key priorities include efforts to contain the newly introduced Law on Investment, the outbreak, job creation, restoration of people’s the recently ratified Cambodia-China Free Trade incomes, domestic revenue mobilization, human Agreement, the Regional Comprehensive Economic resources development, physical infrastructure Partnership  (RCEP), and the recently signed and agricultural development, social projection Cambodia-Republic of Korea Free Trade Agreement and public health system strengthening, and may help attract foreign direct investment inflows improvements in public service delivery, while to the country in the coming years. pursuing continued structural reforms. The draft Challenges and risks 2022 budget will support the Commune and Sangkat elections and Cambodia’s regional and Risks remain tilted to the downside. Despite international commitments as the country holds accelerated vaccination progress, risks of further the ASEAN chairmanship in 2022. disruptions remain high, given the relatively high numbers of cases and mortality. COVID-19 Outlook continues to be unpredictable and the possibility Cambodia’s real GDP growth is projected to of new or existing variants of the virus spreading reach 2.2 percent this year (table 3). This year’s in the country could lead to a possible resurgence relatively weak growth is due to a resurgence of in new cases. A slowdown in global demand could COVID-19 cases, which slowed the recovery, hurt export-oriented sectors of the economy, especially of the tourism, wholesale, and retail while the tourism sector may recover even more sectors during the second and third quarters of slowly than expected, as consumers may remain reluctant to travel far distances, despite eased 2021. Traditional growth drivers, especially the travel restrictions. garment, travel goods, footwear, and bicycle manufacturing industries, as well as agriculture, In addition, high credit growth and continue to underpin the economic recovery. concentration of domestic credit in the The electrical, electronic, and vehicle parts construction and real estate sector remains manufacturing industries are gradually emerging, a key risk to Cambodia’s financial stability. while the agroprocessing industries, in particular Unless the relaxation measures can help restore food and wood processing, and furniture, are external demand for the country’s capital-intensive picking up. property development projects, the construction CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 37 Recent Economic Developments and Outlook boom that the country witnessed during the pre- banks and microfinance institutions, the reported pandemic period, may not return anytime soon, nonperforming loan ratios may not correctly given Cambodia’s relatively small domestic market. reflect the level of debt distress facing the banking Despite the fact that those developments have and microfinance system. Loan restructuring been financed in large part by FDI, its collapse, measures allow banks and financial institutions if it occurs, will have a far-reaching impact on to maintain the same credit classifications once the domestically financed property development loans are restructured.36 By mid-2021, 367,239 industry, and eventually on the financial sector. borrowers’ accounts (11.1 percent of total Monetary and fiscal measures introduced to prop borrowers’ accounts) amounting to US$5.5 billion up property development activity may be able to (13.6 percent of total outstanding credit) had been help the industry stay afloat in the short term. restructured. In the first half of 2021, reported Cambodia is graduating from least developed nonperforming loan ratios remained low at 2.5 country (LDC) status in the next several percent for the banking sector and 2.0 percent years. After graduating from the LDC category, for the microfinance sector. However, given the Cambodia is expected to no longer benefit from continued loan restructuring process offered by LDC-specific international support measures. Table 3: Macro outlook National Accounts and Prices 2020pre 2021p 2022p 2023p GDP at constant market prices (% change) -3.1 2.2 4.5 5.5 Agriculture 0.4 1.0 1.3 1.5 Industry -1.4 6.2 8.5 8.7 Services -6.2 -1.5 1.8 3.6 Inflation, consumer prices (annual %, period 2.9 3.5 3.8 4.2 average) General Government (% of GDP) Revenue and grants 23.9 20.7 21.0 21.5 Expenditure and net lending 28.4 26.7 26.9 26.3 Overall balance (including grants) -4.5 -6.1 -5.9 -4.8 Foreign financing 4.2 3.2 3.9 3.6 Net domestic financing (from current savings) -0.7 1.7 0.9 0.0 Amortization 1.0 1.2 1.1 1.2 Money and credit Broad money (% change) 15.3 20.0 21.4 21.0 Credit to the private sector (% change) 17.7 23.2 25.8 28.1 External Sector (US$ million unless otherwise) Exports (goods and services) 15,518 17,987 21,318 24,504 Imports (goods and services) 16,974 23,969 24,764 26,918 Foreign direct investment, net inflows 3,485 3,307 3,745 3,800 Gross official reserves 21,228 20,869 21,570 23,788 (months of imports) 10.4 10.1 9.3 9.0 Current account (percent of GDP) -8.2 -26.9 -16.9 -12.8 Exchange rate (Cambodian riel per US$ 4,077 4,070 4,100 4,100 average) Total public debt (% of GDP) 35.7 36.0 35.4 35.0 Memorandum items: Nominal GDP, US$ million 25,880 27,435 29,840 32,890 Source: Cambodian authorities and World Bank staff estimates and projections. Note: pre = preliminary; p = projection. 36 Financial Stability Review for 2020, the National Bank of Cambodia, May 2021. 38 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Recent Economic Developments and Outlook One of the main support measures for LDCs As economic recovery takes shape and the is preferential access to developed economies’ pandemic subsides, it is important to start markets under the Generalized System of reprioritizing government fiscal intervention Preferences (GSP), including “Everything But to rebuild fiscal space in the short to medium Arms.” Of the 15 countries granting GSPs, at term. To this end, the ongoing public expenditure least five are Cambodia’s main export markets, review exercise should help improve “value for which include the United States, the European money” of public expenditure going forward. Union, the United Kingdom, Canada, and Japan. To avoid depletion of government deposits, fiscal support (monetary assistance under loan Policy options restructuring measures) to the industries that have To jump-start economic recovery, it is crucial already recovered (or show no signs of recovering to create enabling environments, underpinning due to underlying structural demand issues) key growth drivers to accelerate. The relaxation may be reconsidered. As discussed, government of travel restrictions is fundamental for a recovery deposits already declined by a quarter to 17.6 of the tourism, travel, and hospitality industries percent of GDP by September 2021. With an that will boost job creation and help propel the additionally budgeted fiscal intervention in economy. To this end, immediate actions are 2022, fiscal reserves will be substantially reduced required to promptly establish clear rules and further. Thus, rebuilding the fiscal space needed regulations pertaining to new measures “living to mitigate future shocks is necessary. To this with COVID-19” under the “new normal,” which end, the ongoing tax system reforms, including will facilitate business, investment, and tourism preparation of a new revenue mobilization activities. Introducing accommodative regulatory strategy for 2024–28, will help. and fiscal measures, leveraging the newly Finally, financial system soundness remains introduced investment law to support a prompt key to macroeconomic stability in Cambodia. revival of the tourism, travel, and hospitality Going forward, given a relatively modest recovery industries will be an important next step. In this of the tourism, travel, and hospitality industries regard, close collaboration between the public and the subdued construction and real estate and private sectors will be essential. sector, it is necessary to continue to closely To attract FDI inflows, taking advantage of monitor asset quality. A more cautious approach improved external demand conditions, it may be adopted to loans against property, which is crucial to promptly introduce necessary grew quickly during the pre-pandemic period. regulations and arrangements to smoothly The country has a relatively large number of implement the newly introduced Law on banks and microfinance institutions, creating a Investment. A sub-decree on the implementation challenge in ensuring that the financial system of the new law, including a number of necessary is well supervised and regulated. It is crucial to (downstream) regulations and arrangements, such continue to improve confidence in the banking as the application procedures for registration of system as deposits remained the dominant an investment project, and special procedures source (67 percent in 2020) of funds for banks. for applying for a work permit and employment, Looking ahead, the central bank is committed to remain to be enacted. In addition, investor staying vigilant and standing ready to introduce awareness and understanding of the new law, as appropriate supportive measures. In the post- well as the recently ratified Cambodia-China Free COVID-19 period, the withdrawal of any policy Trade Agreement, the Regional Comprehensive supports should be well communicated and on a Economic Partnership, and the recently signed gradual basis to achieve a balance between growth Cambodia-Republic of Korea Free Trade and stability. Agreement, need to be heightened. CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 39 Special Focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia SPECIAL FOCUS: THE IMPACT OF THE COVID-19 PANDEMIC ON LEARNING AND EARNING IN CAMBODIA37 INTRODUCTION The COVID-19 pandemic has caused tremendous damage to education systems, learning, and the lifetime earning potential of today’s students. In February–March 2020, Cambodia joined 192 other countries that either fully or partially closed their schools. In a few weeks, more than 1.6 billion students were left without in-person instruction.1 Hundreds of millions of students, including those in Cambodia, have been out of school for more than a full year. To mitigate the damage, most countries launched remote learning alternatives. But students, teachers, and parents had little time to prepare, thus reducing the effectiveness of the remote learning programs. Further, social inequality resulted in unequal access, increasing the divergence between rich and poor where remote learning programs were effective. Cambodia’s current cohort of students stands to lose 1.5 learning-adjusted years of schooling—15 percent of pre-pandemic expectations—unless drastic action is taken. This will have huge economic ramifications, reducing their expected annual incomes by US$738 in purchasing power parity (PPP) terms (figure S.1). This analysis, detailed below, builds on an earlier World Bank study that estimated a five- month shutdown would result in a global decline of 0.6 learning-adjusted years of schooling for today’s cohort of students, translating to US$10 trillion in lost lifetime wages.2 But some countries—including Cambodia—have already experienced far longer shutdowns, which means the ultimate learning and earning toll will be higher. The consequences fall heaviest on those least prepared to endure them and will be felt for decades to come. Figure S1: Estimated learning and earning losses are substantial Decline in learning-adjusted years of schooling and average annual incomes, by scenario a� Learning-adjusted years of schooling b� Average annual earning per student (2017 USD, PPP) 6�5 6,000 5,600 6 5,200 5�5 5 0 0 Baseline Optimistic Intermediate Pessimistic Sources: World Bank staff calculations based on Azevedo and others (2021). Note: The modeling framework is described below. Scenario parameters are given in Table S.4. The intermediate scenario is intended to reflect the most likely outcome, based on the data available. 37 This Special Focus was prepared by Bradley Robert Larson. The author wishes to thank Toby Linden, Tara Beteille, Runsinarith Phim, Simeth Beng, and Fata No for their inputs and suggestions. 42 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia Policymakers and families face difficult tradeoffs when deciding when to resume in-person education. Despite the huge costs of keeping students at home, no one wants to risk their health and safety. The problem has become worse with the emergence of the Delta variant, which spreads more readily among children and vaccinated individuals. This Special Focus details the pandemic’s impact on education in Cambodia and the tradeoffs policymakers face in managing it. It is concerned primarily with K–12 education, since available data indicates that is where the impact has been felt the most. It first assesses the government’s policy actions to date against international guidance and Cambodia’s specific circumstances. It then describes the steps policymakers have taken to mitigate the impact of school closures on learning and measures the reach of the country’s remote learning initiatives. Next, it attempts to quantify learning losses in Cambodia and estimates future earning losses that will result. Finally, it provides guidance and policy options to mitigate any additional short-term losses, safely return to in-person education, and “build back better,” so that the education system can emerge stronger from the pandemic than it entered, students can recoup learning losses and secure future earnings, and the economy can resume the strong growth necessary to reach high-income status. THE GOVERNMENT SUCCESSFULLY PREVENTED A MAJOR DISEASE OUTBREAK, BUT AT SIGNIFICANT COST TO THE EDUCATION SYSTEM AND STUDENTS Authorities in Cambodia acted quickly to contain the spread of the coronavirus. The Royal Government of Cambodia led a whole-of-government response, with the Ministry of Health overseeing public health actions. The government’s national action plan encompassed four objectives: reduce and delay transmission; minimize serious disease and reduce associated deaths; ensure ongoing essential health services, particularly during the outbreak’s peak periods; and minimize the social and economic impact. A rapid response team of 3,000 members was set up to conduct case investigations and contact tracing. Official updates were transmitted through television, social media, and other channels, including targeted materials for at-risk groups. And Cambodia cooperated with United Nations agencies and other development partners in its response.3 Education has been severely affected by the pandemic and the government’s efforts to contain it. On March 16, 2020, days after the World Health Organization (WHO) declared COVID-19 a global pandemic, the Ministry of Education, Youth, and Sports (MoEYS) closed all education institutions in the country as a preventive measure. This disrupted learning in all of the country’s 13,482 schools—both public and private—and affected 3,210,285 students and 93,225 teachers (table S.1).4 In July 2020, the education minister formally endorsed the Cambodia Education Response Plan to the COVID-19 Pandemic to provide guidance to the education sector and stakeholders on how to prevent the spread of the disease, continue to support students while schools were closed, and eventually reopen schools. Notably, it envisaged a shorter shutdown than has prevailed, with three of its four key priorities for June 2020–December 2021 related to restarting or strengthening in-person education: 1) Staff and students are able to continue remote teaching and learning safely; 2) Students and education staff return to education institutions safely; 3) Staff and students are able to teach and learn in an adaptable learning environment; and 4) MoEYS systems at the national and subnational levels have increased resilience. According to the COVID-19 response plan, MoEYS would base its decision to reopen schools on guidance from the Royal Government of Cambodia. Partial reopening would precede full reopening, the process would have to be safe and consistent with the overall COVID-19 health response, and “all reasonable measures [would] be taken to protect students, teachers, staff, and their families.”5 In August 2020, MoEYS announced a three-phase plan for reopening schools that adhered to the national strategy. In September, authorities allowed 20 private schools with high safety standards to reopen in Phnom Penh, Siem Reap, and Battambang. In October, authorities allowed all grade levels CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 43 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia Table S.1. Timeline of policy actions and related developments affecting schools and learning, 2020–2021 Date Action January 27, 2020 First confirmed case of COVID-19 in Cambodia March 7, 2020 First local transmission of COVID-19 in Cambodia confirmed in Siem Reap; officials announce that schools in the province will close for 14 days March 11, 2020 World Health Organization declares COVID-19 outbreak a global pandemic March 16, 2020 Government of Cambodia closes all education institutions, including public and private schools; MoEYS announces teleworking arrangements April 2020 MoEYS issues directive and operational guidelines for remote learning; elaborates management tasks; and requests funding for contract teachers April 8, 2020 MoEYS postpones national exams at lower and upper secondary levels May–June 2020 MoEYS suspends new teacher recruitment for 2020 and issues guidelines to teacher education institutes for e-learning training and capacity development July 10, 2020 MoEYS issues guidance on health promotion to prepare for school reopening, with requirements for monitoring, case management, and reporting July 15, 2020 The Minister of Education, Youth and Sport formally endorses the Cambodia Education Response Plan to the COVID-19 Pandemic September 2020 20 private schools with high safety standards allowed to open in Phnom Penh, Siem Reap, and Battambang October 2020 4 low-risk provinces—Kratie, Mondulkiri, Ratanakiri, and Stung Treng—allowed to reopen all grades; other provinces to reopen grades 9–12 November 2, 2020 Remaining schools reopen throughout the country November 8, 2020 Schools in Phnom Penh and Kandal close for two weeks November 29, 2020 Private schools closed for two weeks January 11, 2021 Schools open for the delayed 2020–2021 academic year February 4, 2021 Cambodia’s Ministry of Health approves use of Sinopharm COVID-19 vaccine February 20, 2021 Cambodia begins vaccinations with Sinopharm, Sinovac, and AstraZeneca February 20, 2021 A large COVID-19 outbreak in the capital—known as the “February 20 incident”—results in school closures in Phnom Penh and Kandal March 20, 2021 School closures are extended to the rest of the country September 15, 2021 More than 200 schools opened in Phnom Penh November 1, 2021 Schools across the country reopen; classrooms are limited to 15 students, and they are required to sit 1.5 meters apart to maintain social distancing Sources: World Health Organization, “Cambodia: Coronavirus Disease 2019 (COVID-19) Situation Report,” various dates, 2020–2021; MoEYS, Education Sector Working Group, and national and international partners, Cambodia COVID-19 Joint Education Needs Assessment, March 2021; World Bank, “The Socioeconomic Impacts of COVD-19 on Households in Cambodia: Results from the High-Frequency Phone Survey of Households Round 5 (1–21 March 2021),” June 2021. to reopen in four low-risk provinces—Kratie, Mondulkiri, Ratanakiri, and Stung Treng; allowed grades 9–12 to reopen in the rest of the country; and allowed all public universities to reopen if they followed strict procedures and guidance from WHO and the Ministry of Health. Safety measures for grades K–12 included restricting class size to 20 students and seating students two meters apart. The country’s remaining schools reopened completely on November 2, 2020.6 Schools closed again after what became known as the “February 20 incident.” On that day, in 2021, four people left the hotel where they were quarantined. They dispersed across the city and frequented a popular night club. The incident resulted in the biggest community outbreak in Cambodia to that point, with 31 confirmed cases. By the end of the month, MoEYS issued a notification to close public and 44 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia private schools at all levels in Phnom Penh and Kandal province. On March 20, the order was extended to schools nationwide as a preventive measure.7 By mid-2021, most countries in Eurasia and Africa had fully reopened schools for in-person instruction. Most of the rest of the world offered some form of hybrid or mixed education, in which certain grades or regions remained closed, but many students could return to school.8 In contrast, Cambodia had entered its worst phase of the pandemic. At the peak of the outbreak—in late June and early July of 2021—the country averaged nearly 1,000 new cases per day. As a consequence, Cambodia was among the relatively few countries in the world that persisted with remote-only education.9 The government started reopening schools again in late 2021. On September 15, around 200 low- risk secondary schools opened in Phnom Penh, allowing the return of nearly 140,000 vaccinated students and more than 10,000 vaccinated teachers. Finally, on November 1, schools reopened nationwide for the first time since March 2021. All schools are required to operate with strict adherence to the COVID-19 measures laid out by the MOH. Teachers must be fully vaccinated. Students have their temperatures checked and sanitize their hands when they enter the school. Only 15 students can be in a classroom at a time. And they are required to sit 1.5 meters apart to maintain social distancing. In sum, Cambodia has been very cautious in its response to the COVID-19 pandemic, resulting in exceptionally long school closures. In EAP, only Myanmar and the Philippines kept schools closed a comparable duration (figure S.2).10 This has two implications for Cambodia. On the one hand, the health and safety measures currently in force will likely improve resiliency and reduce the chances that future school closures are necessary. On the other hand, the long duration of school closures to date means that Cambodia faces a proportionately larger challenge in reintegrating students and recouping lost learning. Figure S2: Cambodia kept its schools closed longer than most countries in developing EAP Status of school closings in developing EAP, February 2020–October 2021 Cambodia China Indonesia Lao PDR Malaysia Mongolia Myanmar Papua New Guinea Philippines Thailand Timor−Leste Vietnam Fiji Kiribati Marshall Islands Micronesia, Fed. Sts. Nauru Samoa Solomon Islands Tonga Tuvalu Vanuatu Mar Jun Sep Dec Mar Jun Sep 2020 2021 Academic break Closed due to COVID−19 Fully open Partially open Sources: World Bank staff calculations using UNESCO, Global monitoring of school closures caused by COVID-19, November 30, 2021. CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 45 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia EDUCATION WILL ALSO SUFFER FROM THE PANDEMIC’S ECONOMIC AND HEALTH IMPACTS The COVID-19 pandemic—and the government’s response—also caused significant damage to the economy, which has a secondary negative impact on education. Demand collapsed for tourism and hospitality services, Cambodia’s second-largest growth driver and a key source of foreign currency earnings. In 2020, tourist arrivals crashed to 980,055 from 5,034,903 the year before, and they remain low in 2021.11 Export demand for garment, footwear, and travel goods also declined, undermining the largest formal employment industry and depriving the government of its main source of direct revenue. Before the pandemic, 82 percent of the population was employed, according to a World Bank survey. That rate dropped to 71 percent in May 2020 and 65 percent in October 2020.12 The national lockdowns also slowed the domestic economy. Overall mobility, measured anonymously by Google using mobile devices, negatively correlated with restrictions imposed by the government, measured by the Oxford stringency index (figure S.3, panel a).13 When the first lockdowns were imposed after the pandemic was announced in March 2020, mobility dropped by 40 percent from the pre-pandemic norm. It stabilized at roughly 80 percent until infection rates started increasing in early 2021. Following the February 20 incident, the government imposed new restrictions that persisted through the rapid spread of the disease in mid-2021. Mobility dropped by half before stabilizing at roughly 70 percent of the pre-pandemic norm. Although the daily infection rates have fallen—and Cambodia has fared relatively well compared to its neighbors (figure S3, panel b)—mobility is only starting to recover.14 Income shocks and increased poverty will result in more dropouts Poverty simulations based on macroeconomic projections show that the pandemic could increase poverty by 5.4 to 6.0 percentage points. This equates to 859,000 to 950,000 additional poor Figure S3: Cambodia has had fewer cumulative COVID-19 cases per capita than most of its neighbors, but cases and government restrictions have been higher in recent months New daily confirmed cases, policy stringency index, and mobility index, and cumulative confirmed cases by country a� Cases, policy response, and impact in Cambodia b� Cumulative cases, developing EAP 15 0 Confirmed cases per thousand population 1,000 100 800 80 Daily confirmed cases 100 Index scores 600 60 400 40 50 200 20 0 0 0 m ea Ph doneste M alayFiij La anm a Ti V PD r In −L m ia ail es M d on sia lia m iet R o a y i an M bod ilip es or na Th pin Ca uin go 0 1 20 21 22 02 02 G 20 20 20 ,2 ,2 ew 1, 1, 1, l1 l1 aN n n n Ju Ju Ja Ja Ja pu Pa Daily cases Stringency index Mobility index Sources: World Bank staff calculations using data from Johns Hopkins University 2021, Google 2021, and Oxford 2021. Note: Daily confirmed cases reflect the seven-day trailing average. The Oxford Government Response Tracker, known as the stringency index, measures common policy responses governments have taken in response to the pandemic. It comprises 17 indicators, such as school closures and travel restrictions. The Google mobility index measures physical movement at specific locations relative to a pre-pandemic average. Values are the percent change from a baseline equal to 100, averaging across retail, grocery, transit, park, and workplace locations. Economies with fewer than 1 cumulative case per 1,000 population are not shown: China, Kiribati, Marshall Islands, Samoa, Solomon Islands, and Vanuatu. 46 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia and a reversal of six years of progress against poverty. Households relying on nonagricultural wages, particularly construction workers, have been hit hardest.15 The big danger, from an education perspective, is that income shocks could result in families not being able to afford school or sending their children to work, yielding an increase in student dropouts. An early estimate for developing Asia estimated that half a million more students dropped out of school in 2020 because of the pandemic, out of 800 million preprimary, primary, and secondary school students.16 In theory, older students should be more at risk for dropping out, because the alternative of paid work increases the opportunity cost of remaining in school. This has been generally true for Cambodia, but the pandemic appears to have had a bigger impact on younger students than older students. The national dropout rate increased in 2019/2020, reversing years of declining trends. Overall, males (7.7 percent) were more likely than females (6.8 percent) to drop out. For primary school, the dropout rate increased from 4.4 percent in 2018/2019 to 7.3 percent in 2019/2020 (figure S.4). Dropouts at early grade levels are more detrimental because of the higher amount of foregone learning. The lower- secondary dropout rate increased from 15.8 percent to 18.2 percent. Data for upper secondary shows a decline in the dropout rate from 16.9 percent to 8.4 percent from 2018/2019 to 2019/2020, but this is misleading. The MoEYS canceled the baccalaureate exams that grade 12 students typically take to graduate. Those who do not pass are counted as dropouts. The inability to administer exams—in addition to a general effort to keep students enrolled during the pandemic—means the dropout rate is artificially low.17 Figure S.4. Dropout rates increased during the Dropout rates for 2020/2021 will likely be higher than the historical average if pandemic baccalaureate exams are reinstated. According Dropout rates, by grade level, 2010/2011– to MoEYS, approximately 50 to 75 percent of 2019/2020 students at all levels—pre-primary, primary, lower secondary, and upper secondary—returned to 25 school after the first reopening in 2020. This rate 20 of return is on par with Thailand and Timor- Leste, but worse than Mongolia and Vietnam. It Percent 15 implies at least a 25 percent dropout rate if these 10 students ultimately do not return.18 5 Poor nutrition makes it harder to learn 0 Nearly 10 percent of children under five suffer from acute malnutrition in Cambodia, 2010/2011 2013/2014 2016/2017 2019/2020 and nearly a third of children under five suffer School year from chronic malnutrition. Acute malnutrition, Primary also known as wasting, is characterized by a rapid Lower secondary deterioration in nutritional status and defined by Upper secondary a low weight for height. Chronic malnutrition, Sources: World Bank staff calculations using data from MoEYS, also known as stunting, is a form of growth Public Education Statistics & Indicators, 2011/2012–2020/2021. failure that develops from inadequate nutrition Note: Primary comprises grades 1–6; lower secondary grades 7–9; over a long period of time.19 It is associated with and upper secondary grades 10–12. late enrollment and less school attainment, lower cognition, and worse executive function. Reversing cognitive impairment is especially difficult after age six, when children’s brains become less malleable.20 The pandemic has made the situation worse, with the share of households that reduced food consumption to cope with the shock higher in Cambodia than other countries in the region, especially among those that lost income.21 According to a survey conducted in August–September, 2020, 40 percent of households reported having less access to food than before the pandemic. The CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 47 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia impact was especially severe for preschool and primary students, those in nonformal education, and those with a valid ID Poor card, with around half of respondents in each category reporting less access to food.22 PRE-PANDEMIC LEARNING CHALLENGES Developing countries around the world have made great strides in increasing student enrollment and educational attainment in recent decades. In recent years, Cambodia has made significant strides particularly in early childhood education, where the number of five-year-olds enrolled increased from 122,778 in 2016/2017 to 147,580 in 2019/2020. Over the same period, the primary gross completion rate increased from 82.5 percent to 88.2 percent.23 But despite more students going to school for more years, they are still not learning as much as they should. Nearly half of grade 2 students in Cambodia failed to answer a single reading comprehension question correctly about a passage they had just read. Nor did learning outcomes improve over much of the last decade. Students in grades 6 and 8 correctly answered only half of the questions on the National Student Assessments, conducted annually during 2013–2017. And there are deep inequities, with poor children less likely to be enrolled and less likely to reach competency even if they attend school.24 Measuring education using learning-adjusted years of schooling (LAYS) captures both the quantity and quality of schooling for the average student. Quantity is measured in total years of expected schooling and has long been a standard measure of schooling outcomes. Quality of schooling is captured in how well the average student performs on learning assessments relative to the average student in other countries. Essentially, learning-adjusted years of schooling is a product of the average years of schooling and a measure of learning relative to an international benchmark. The amount of learning the average student achieves with the same quantity of education can vary significantly across countries, and the gap between expected years and learning adjusted years is particularly large in developing countries. Figure S.5. Cambodia’s total years of expected schooling are among the lowest in mainland Asia, although relative quality is higher than its close peers Total expected and learning-adjusted years of schooling, 2020 14 12 10 8 Years of school 6 4 2 0 D ng a Ch m M N u am SA ea ia K , C nd AR ap � Is tu N ste un M ala u us lia et a a, a , n ng na e sh Van ds G alu Ti ao ea or R y u es T Fiji Fe nga Sa ts� In pin i do es ail a Pa d ew Tuv s m ar a Ph iri a p ilip bat d ei o ysi Th nesi Vi in re hin di K o or M la an a M ur m PD ao Z al Re Ca anm la all ua L uin S ar o lan lan Si Chi m R la e bo n ap ac ew str a ia, o sa -L d� J Is A on o m gS aN ar lo on on M So pu icr gK Br Pa M on H Total: Cambodia Developing EAP High-income EAP Learning-adjusted: Cambodia Developing EAP High-income EAP Source: World Bank staff calculations using data from World Bank. 2021c. 48 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia Cambodia’s total expected years of schooling are among the lowest in mainland Asia. Learning- adjusted years of schooling is also low, but the gap between the two is relatively narrow compared to its close peers. That suggests that the quality of schooling students do attain is proportionately better—at least as measured by student performance on internationally comparable learning exams. Still, Cambodia has a long way to go to be regionally competitive, especially compared to the region’s high-income countries, which perform better in total expected and learning-adjusted years of schooling compared to the region’s developing countries (figure S.5). These quality gaps are important because learning and skills drive individual productivity, aggregate growth, and a host of other development outcomes.25 The learning crisis is a major contributor to human capital deficits across the developing world. According to the World Bank’s Human Capital Index (HCI), the average child born just before the COVID-19 pandemic would be only 56 percent as productive by age 18 as the benchmark of a child who had a complete education and full health. A child born in Cambodia would be only 49 percent as productive.26 As of 2019, more than half of children at late primary age are not proficient in reading, more than twice the regional average. And expenditure per child of primary-school age is US$261 (PPP) per year, barely 8 percent of the EAP average and 31 percent of the average for lower-middle income countries.27 EFFORTS TO MITIGATE THE IMPACT OF SCHOOL CLOSURES ON STUDENT LEARNING Most countries around the world provided some form of remote learning when schools shut down. Modalities include both self-paced and instructor-led lessons delivered through a variety of means, including print-based homework, radio, TV, mobile phones, text messages, and internet-based—ranging, in general, from less to more interaction between students and teachers. Others employed a hybrid model, combining remote learning with in-person instruction where it was safe or remote learning was infeasible. Best practice also called for aligning content with existing curriculums, making use of existing materials, providing guidance and support to teachers and caregivers on how to support students, and creating offline options for settings with limited technology or connectivity.28 MoEYS launched remote learning programs across multiple channels With the support of development partners, MoEYS acted quickly to prepare and deliver remote learning programs. The initial focus was students in grades 9–12 who would be taking the annual national examinations, and the first learning programs could only be accessed online. But as it became obvious schools would be closed for an extended period, MoEYS began developing programs for students in all grades, K–12. The content is intended to cover all subjects and development domains, and employs a hybrid approach, combining online synchronous learning, which happens in real time with interaction between teachers and students, with asynchronous learning, which lacks real-time interaction but allows for self-paced learning.29 To reach a broader swathe of the population, MoEYS also started to deliver the programs across more diverse channels. In early 2020, MoEYS launched a dedicated television channel (TVK2) for grades 9–12 and multilingual education radio-based programs designed for minority ethnic groups in preschool and grades 1–3 in the Northeastern provinces. Remote programs were offered online, through social media, over television and radio broadcasts, and through digital communication tools (table S.2). Among the most popular are TVK-Education, a television channel operated by MoEYS, and MoEYS E-learning (box S.1).30 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 49 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia Table S.2. Remote learning channels in Cambodia Channel Type Target Reach MoEYS E-learning website Online/mobile app Highschool and below 100,000 installs MoEYS Facebook Social media Highschool and below 3,669,000 followers MoEYS YouTube Online Highschool and below 147,000 subscribers Krou Cambodia Social media Highschool and below 928,000 followers Komar Rien Koma Cheh Social media Early grades 29,600 followers “Distance education application” on Mobile app Grades 9–12 Google Play and Apple Store TVK2 Television/mobile app Highschool and below 10,000 installs Apsara TV Television/social media Grade 12 and Early 185,000 followers grades Sky One TV-35 Television/mobile app Grade 12 1,000 installs Digital One TV-6 Television/mobile app Grade 12 500,000 installs Splus TV / Wiki TV Television/mobile app Grades 9–12 10,000 installs Singmeng TV/ Wiki TV Television/mobile app Grades 9–12 50,000 installs Zoom Communication tools All grades Google Meet Communication tools All grades Telegram Communication tools All grades WhatsApp Communication tools All grades BEEP platform Online/social media Lower secondary 13,000 followers dropouts Multilingual radio-based programs Radio Preschool and early Kratie, Mondulkiri, and grades (ethnic minorities) Ratanakiri provinces Sources: MoEYS 2021; UNESCO 2021; Google Play Apps. Box S.1. Popular remote-learning channels in Cambodia The Cambodian government and relevant stakeholders introduced several distance learning programs when the pandemic caused nationwide school closures. TVK2, or TVK-Education, is among the most popular. It was launched in April 2020 as a new channel of the state-owned National Television of Kampuchea. Originally targeted to students in grades 11–12 to help prepare them for exams, its mandate has since expanded to include younger grades and more diverse subjects, including hygiene and legislation. It was intended especially to reach students without access to the internet. As of September 2021, 1,000 video lessons had been produced, up from around 200 in mid-June 2020. In addition to being broadcast on the TVK2 channel, videos are available on MoEYS’s official online and digital platforms (https://www.tvkhd.tv/category/ education) and the Android Play and Apple App Stores. Coverage is relatively good for students in grades 1–6, with 850 video lessons on mathematics and Khmer literacy, accessible both on the TVK2 channel official website and through the MoEYS online learning center. In contrast, only 153 video lessons are available to students in grades 7–12, on mathematics, Khmer literacy, chemistry, physics, history, and biology. These are supplemented by other learning materials, including textbook chapters. To access them, students need to create an account (https://elearning.moeys.gov. kh/?lang=en). The government also unveiled a smart phone application to support student learning. It offers video content on different subjects for grades 9–12 and enables students to download any video they wish to keep as study materials. Students can use the app through their phone service or data plan. Given that approximately 1.5 million students remain unable to access the online platform, this App has the potential to promote equality and inclusiveness, as well as foster lifelong learning for marginalized students. Sources: MoEYS 2021; Hanamaru Lab 2021; UNESCO 2021. 50 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia Overall, considerable effort has been made to develop and distribute remote learning programs. The subject matter is comprehensive and targets students at all grade levels and abilities. Video lessons are of high quality. Channels are diverse, including computer, mobile phone, television, and radio- based options, and MoEYS has made accommodations for students who cannot connect with those technologies—due to access, cost, or other factors—by instructing teachers to photocopy and distribute workbooks.31 Teachers and caregivers had to transition to remote learning with little preparation or training Teachers transitioned rapidly to remote learning in the early months of school closures. The great majority—89 percent—started teaching online using both prerecorded (asynchronous) and live (synchronous) methods. Approximately 85 percent also facilitated small-group learning, on average twice a month. These small groups typically comprised six to eight students who watched MoEYS videos together, with the teacher elaborating on the lesson. And 75 percent engaged in frequent communication with students through different channels, such as WhatsApp and Telegram, when schools were closed. Most students heard from teachers at least twice a week, but nearly one-fifth reported no contact at all.32 In addition to quality programming, teachers require appropriate training, monitoring, and support to be successful in delivering remote learning programs. To help teachers transition, many ministries of education provided special training and professional development activities, resources and lesson plans adapted to remote teaching, remote learning guidelines instructions and, in some cases, information and communications technology (ICT) devices and free connectivity. This was generally not the case in Cambodia, where teachers received much less support than their counterparts in other EAP countries for which data are available.33 Figure S.6. Caregivers, students, and teachers Teachers in Cambodia have expressed were not satisfied with the support concern about the level of support they they received in the transition to received and how capable they were of remote learning delivering remote learning. In the early months Perceptions of adequacy (percent), by of school closures, only 18 percent felt they respondent type received adequate support (figure S.6). Moreover, 100 only 13 percent of teachers and 22 percent of local authorities felt they had enough capacity to 80 perform their job functions when schools were closed. Preschool (92 percent) and primary school Completely adequate 60 teachers (88 percent) were most likely to report Percent Adequate Neither partial or insufficient capacity to do their jobs. 40 Inadequate Completely inadequate The most frequently cited capacity development needs reported by teachers were related to lesson 20 planning and use of social media to support students and caregivers.34 The situation may have 0 Caregiver Student Teacher improved as the school year progressed and Sources: World Bank staff calculations using data from MoEYS, teachers and administrators gained experience, Joint Needs Assessment, 2021. but no data are available to verify. Finally, the lack of preparation for teachers, coupled with mobility and connectivity restrictions, meant that parents or caregivers were often primarily responsible for overseeing students’ daily learning activities, and they were even more dissatisfied than teachers about the support they received. A great majority of parents and caregivers—91 percent—reported supporting home-based learning in the early months of school closures, but only 23 percent reported supporting distance learning all of the time. In general, parents and caregivers found it easier to support children in secondary school than in primary and preschool. And the more education parents and caregivers had the more they were CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 51 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia able to provide support for their students’ remote learning.35 However, only 8 percent found the support they received adequate (figure S.6), with little variation across gender, disability, and ID poor card status. About half of all parents and caregivers cited lack of time due to other responsibilities, lack of knowledge of learning content and materials, and inability to use technologies or devices as barriers to engagement with their students’ remote learning. Most students had access to ICT and learning materials, but still had trouble accessing remote learning programs For students to benefit from remote learning programs, they need appropriate information and communications technology (ICT), access to reliable infrastructure, and basic learning materials to benefit from remote learning programs. In the EAP region, households in richer countries are more likely to have access to a computer, mobile phone, television, and radio, suggesting that the delivery of remote learning programs is easier—and more equitable—at higher income levels. But Cambodia is not far behind, and ICT and infrastructure do not appear to be critical barriers to participation in remote learning programs. The country seems to have a highly saturated, competitive telecommunications market, a liberal approach to spectrum assignment, and access to cheap handsets—which together contribute to low retail prices and high usage. During 2013–2018, household access to mobile phones increased from 10 percent of households to 84 percent, and the number of active mobile broadband subscriptions increased from 10 per capita to 83 per capita (figure S.7).36 Within four years of its introduction, more than 80 percent of the population was covered by an LTE/WiMax network at speeds sufficient to watch streaming videos or communicate with teachers and fellow students. And as recently as 2017, the country was reported to have had the cheapest mobile internet prices and the third-highest mobile data usage in the world.37 Figure S.7. Household access to mobile phones has increased dramatically in Cambodia in recent years Share of households with access to selected technologies and mobile broadband subscriptions per capita, Cambodia (2013–2018) compared to other EAP countries (2018) a� Computer b� Mobile phone c� Television d� Mobile broadband 100 100 100 100 Subscriptions per capita Share of households Share of households Share of households 80 80 80 80 60 60 60 60 40 40 40 40 20 20 20 20 0 0 0 0 0 6000 12000 0 6000 12000 0 6000 12000 0 6000 12000 GDP per capita GDP per capita GDP per capita GDP per capita Cambodia (2013-2018) Mainland EAP (2018) Pacific Island EAP (2018) Sources: World Bank staff calculations using data from ITU 2021. Note: GDP per capita in constant 2010 U.S. dollars. The proportion of households with computers is estimated. Countries with more than 100 subscriptions per capita not shown: Fiji (148), Malaysia (117), and Thailand (105). Most students in Cambodia also have access to basic learning materials. These include school textbooks; supplementary reading materials like storybooks and reference materials; and basic writing materials, including paper, pens, and notebooks (figure S.8). However, in most cases, fewer students had access to basic learning materials than supply-side actors expected. For example, 34 percent of students (including teacher trainees) reported having access to school textbooks, far less than estimated by teachers 52 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia Figure S.8. Most students have access to basic (60 percent), school directors (83 percent), learning materials education administrators (79 percent), and Access (percent of students), by grade level local authorities (69 percent). Beyond reading and writing materials, 40 percent of students 60 also had access to a workspace at home, with 45 a desk, chair, and adequate lighting.38 Given the broad range of remote Percent 30 learning modalities, almost all students, caregivers, and educators have access 15 to at least one resource that could allow 0 them to participate in remote learning Supplementary School Basic writing None of programs. The most common—as reported reading materials textbooks materials the above by the stakeholders themselves—are Preschool Primary Lower secondary Upper Secondary smartphones and television, which reinforces Sources: World Bank staff calculations using data from MoEYS, Joint MoEYS’s decision to focus its programming Needs Assessment, 2021. on those channels (table S.3). Note: Basic writing materials include paper, pens, and notebooks. Supplementary reading materials include storybooks and reference materials. Table S.3. Almost all students and caregivers have access to some form of ICT or other learning material Percent of respondents with access to select ICT, applications, and infrastructure, by school level of students and caregivers and by type of educator   Students and caregivers Educators Lower Upper School   Preschool Primary secondary secondary Total Teacher director Smartphone 60 61 70 84 69 86 83 Television 56 59 54 47 54 69 55 Electricity 61 50 46 52 53 67 47 Supplementary reading materials 28 39 55 67 47 n/a n/a Social media 39 34 47 60 45 66 55 Workspace at home 33 36 47 54 40 49 30 School textbooks 12 48 45 45 38 n/a n/a Basic writing materials 30 33 26 27 29 n/a n/a Internet access 21 18 29 36 26 39 28 Communication apps 8 7 23 39 21 43 39 Mobile phone 38 37 23 18 28 30 20 Radio 14 12 10 8 12 21 12 Computer/tablet 8 6 6 12 12 34 31 None of the above 4 4 1 1 3 0 2 Source: MoEYS, Education Sector Working Group, and national and international partners, Cambodia COVID-19 Joint Education Needs Assessment, March 2021, pp. 53–55. Note: Social media include Facebook, Twitter, and YouTube. Communication applications include WhatsApp, Telegram, or Zoom. A workspace at home includes a desk and chair and is properly lighted. A mobile phone is a non-smart phone capable of SMS and calls. The student and caregiver total for supplementary reading materials, school textbooks, and basic writing materials is the simple average of the grade-level values. On the other hand, the discrepancy between infrastructure in place, proxied by active mobile broadband subscriptions per capita, and internet access rates reported by students and caregivers is particularly stark. This may indicate that active mobile broadband subscriptions are not CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 53 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia equitably distributed. It could also be attributable to prohibitive costs for some families—which would have worsened during the lockdown—and demand for services within households, even if they had an active subscription. Many families reported difficulty accessing the learning platforms. According to a survey conducted in August–September 2020, the most common challenge cited by respondents was poor internet connectivity (54 percent), followed by financial problems that made it difficult to purchase internet or phone credit (42 percent), the inconvenience of sharing devices (23 percent), lack of awareness of television or radio broadcasting schedules (22 percent), lack of time for learning activities due to daily chores or taking care of siblings (18 percent), and poor television or radio coverage (10 percent).39 Use of remote learning programs has been low Despite the government’s efforts, actual use of remote learning programs has been low since measurement began, and there has been a bias toward more traditional modes of learning. High- frequency phone surveys—conducted in five waves during May 2020–March 2021 for both nationally representative and ID Poor samples—indicate that students in most households had not taken advantage of mobile learning apps, educational television, or educational radio, or other remote learning programs in the week prior to being surveyed. However, a majority did participate in some form of educational activity in all but the fourth wave, when schools had temporarily reopened. The most popular activity was meeting with a teacher or tutor, followed by completing assignments (figure S.9). Meeting with a teacher could undermine the rationale for closing schools if safety measures are not followed and teachers or tutors spread COVID-19 among students.40 Figure S.9. Use of remote learning programs has been low and declining over time Share of children engaged in educational activities, May 2020–March 2021, by type and socioeconomic status (percent of households with children who attended school before the pandemic) a� Any b� Met with c� Completed d� Mobile e� Television f� Other activity teacher assignments apps Percent of households with children who attended school before the pandemic 12 3 4 5 12 3 4 5 12 3 4 5 12 3 4 5 12 3 4 5 12 3 4 5 Round Round Round Round Round Round All students Students from IDPoor households Sources: World Bank staff calculations using data from the World Bank, Living Standards Measurement Study (LSMS), and ID Poor surveys, 2020–2021. Note: The LSMS survey is nationally representative. Survey rounds were spaced two to three months apart: May 2020 (Round 1, LSMS); June 2020 (Round 1, ID Poor); August 2020 (Round 2, both samples); October 2020 (Round 3, both samples); December 2020 (Round 4, both samples); March 2021 (Round 5, both samples). Radio not shown. Mobile apps were the most popular of the strictly remote learning alternatives. Student use, as measured by these surveys, peaked in the first round, in May–June 2020. At that time, 49 percent of the nationally representative sample used one of the three mobile options—mobile apps, television, and radio—collectively, compared to 28 percent of the ID Poor sample. Measured independently, the maximum topped out at 36 percent for mobile apps for the nationally representative sample and 16 percent of the ID Poor sample. For the most part, these remote learning alternatives became less used over time. In the latest round, March 2021, fewer than 14 percent of students used mobile learning apps, and all other options were in the single digits. The share of households with students who listened to 54 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia educational radio was negligible in all cases, never amounting to more than 2 percent and closer to zero percent in most rounds for both surveys.41 These trends are corroborated with usage data from various platforms. For example, the most popular videos on MoEYS’s YouTube channel predate the pandemic, and despite its 144,000 subscribers none of the videos released during the pandemic have more than 75,000 views.42 In most cases, students from ID Poor households were less likely to engage in educational activities. The big exceptions were meeting with a teacher and completing assignments at the start of the pandemic. In every case, students in ID Poor households were less likely than those in the average household to use a mobile learning alternative. This was especially true for mobile learning apps. However, there is evidence to suggest that remote learning alternatives provided an important substitute for traditional modes for students from ID Poor households. Except for the fourth round (conducted after schools had reopened the first time), the majority of students in ID Poor households who used remote learning activities had not met with a teacher or completed an assignment. There is no clear pattern for the population as a whole.43 Remote education is generally not as effective as in-person education Studies have found that digital technology is generally associated with moderate learning gains. However, they work best when technologies supplement teaching, rather than replace it. The effectiveness of remote learning, in general, is more mixed, ranging from negative or negligible effects to unambiguously positive. Digital technologies do best when they supplement in-person education that pays attention to the students’ social context and non-content aspects of learning. Meanwhile, remote learning can be effective for some subjects if the right conditions are in place, particularly for students who have trouble in traditional settings.44 In contrast, most of the digitally enabled, remote learning programs offered during the pandemic—including in Cambodia—do not fit these ideal models. There is very little quantitative evidence of the effectiveness of remote learning during the pandemic, especially in the developing world. Studies in high-income countries, which were quick to roll out remote alternatives and where access to digital technologies is high, show substantial learning losses.45 They were made worse where a lack of preparation by school systems reduced the effectiveness of remote learning alternatives.46 Parents in France and Italy, for example, thought their children learned more slowly during the 2020 lockdowns than when they were in school. There was a stronger negative impact on boys than girls, and on children whose parents had relatively less education.47 And in Belgium, the school closures during the pandemic resulted in learning losses of 0.19 standard deviations in mathematics and 0.29 standard deviations in Dutch language compared to previous cohorts.48 The impact in the developing world has been less studied but is likely far worse. An analysis of five countries in Sub-Saharan Africa estimated a loss in oral reading fluency during the COVID-19 pandemic that ranged from half a year to over one year.49 And the World Bank estimates that the pandemic could drastically increase learning poverty—the percentage of children who are unable to read and understand a simple text by age 10—to 70 percent in low- and middle-income countries, up from 53 percent before the pandemic began.50 MoEYS conducted no formal studies or assessments of the effectiveness of remote learning during the pandemic. In response to a survey administered by UNESCO, UNICEF, and the World Bank, officials acknowledged that students were not used to online study, and that it was not a good alternative to in-person education for preschool or primary students.51 A small-scale survey of students and caregivers conducted in the early months of the lockdown found that 62 percent of respondents thought they were learning less than when schools were open.52 However, since the first school closure, systematic learning assessments that would normally have been administered were postponed or canceled. Consequently, there are no hard data on learning losses due to the pandemic, either on average or for specific populations within the country. Conducting systematic learning assessments should be a top priority as schools reopen. Until then, learning losses can only be estimated given the available data on the use of remote learning programs and their perceived effectiveness. CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 55 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia LOST LEARNING WILL LOWER FUTURE EARNING Despite the government’s efforts to mitigate the damage, the potential impact of the COVID-19 pandemic on lifelong learning and earning is huge. Any interruption in schooling—including planned academic breaks—is detrimental. Forced interruptions that are not expected are worse because they disturb the scheduled curriculum, and the lack of planning and preparation undermines efforts to mitigate the damage. The World Bank framework developed by Azevedo and others (2021) estimated that a five- month-long school closure could result in an average learning loss of 0.6 learning-adjusted years of schooling, dropping the worldwide average to 7.3 years from the pre-pandemic baseline of 7.9 years. Based on historical returns to education, this would result in a future, aggregate earnings loss equal to approximately US$10 trillion in present value terms—16 percent of the total investments made to educate the affected cohort of students. Learning achievement in EAP would suffer proportionately less than other regions, and most of the loss in earnings would be experienced by richer countries because of between-country earnings inequality. But poorer countries would suffer more as a share of spending on education.53 The Asian Development Bank estimated US$1.25 trillion in total losses at present value for developing Asia (including South Asia) using the same model, equivalent to 5.4 percent of the region’s 2020 GDP. These losses cover only private economic returns to education, not the positive externalities for society or the benefits to long-term health—which are large.54 School closures have dragged on far longer for some countries, including Cambodia, than these studies estimated, increasing the toll on students’ present learning and future earning potential. As of November 2021, the average student returning to in-person education in Cambodia is estimated to lose 1.5 learning-adjusted years of schooling and US$738 (PPP) in annual earnings because of school closures that have already occurred. This intermediate estimate is based on Cambodia’s history of school closures, students’ access to and use of remote learning programs, and the learning effectiveness of the remote learning programs—detailed above. The optimistic and pessimistic scenarios are similarly severe (table S.4). These estimates assume students will not recoup learning losses through increased effort, government programs, or other means. Therefore, the scope is large for policy interventions to improve the situation. The logic and methodology behind the estimates are presented below. Table S.4. Learning and earning losses are large in every scenario Effectiveness School closure Use of remote of remote Learning loss Annual income Scenario (school years) alternatives (%) alternatives (%) (LAYS) loss (US$, PPP) Optimistic 1.4 30.2 40 1.4 694 Intermediate 1.4 19.7 30 1.5 738 Pessimistic 1.5 19.7 20 1.6 801 Source: World Bank staff calculations using the framework from Azevedo and others (2021). Note: LAYS = learning-adjusted years of schooling; PPP = purchasing power parity. Learning losses On average, today’s cohort of students in Cambodia will attain 1.5 fewer learning-adjusted years of schooling than the pre-pandemic baseline of 6.8 years because of school closures under the intermediate scenario, using the latest available data and updated assumptions about the effectiveness of remote learning alternatives. Importantly, this assumes that schools will not close again and all students except those who dropped out because of income shocks will return. Under the optimistic scenario, which assumes remote learning alternatives were more effective and that schools will remain open going forward, today’s cohort of students is expected to attain 1.4 fewer learning- adjusted years of schooling. And under the pessimistic scenario, which assumes lower remote learning effectiveness and another, relatively short, school closure, today’s cohort of students is expected to attain 1.6 fewer learning-adjusted years of schooling. 56 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia These estimates are based on the World Bank framework developed by Azevedo and others (2021). The framework models learning loss due to school closure through two components: lost years of schooling (quantity effect) and harmonized test scores (quality effect). The reduction in quantity can be conceived of as the duration of time that students do not acquire new learning because they are not in school and is expressed as the share of the school year that students do not receive in-person instruction. It is also indirectly affected by the increase in the school dropout rate attributable to income shocks arising from the pandemic and government efforts to contain it. The reduction in quality can be conceived of as lost learning because of disengagement with the school system. In other words, students forget what they learned in the past because they are not in school, and each year of schooling acquired to date has therefore produced less learning overall. The reduction in quality is measured in terms of the Harmonized Learning Outcomes (HLO) score, which uses international learning assessments to create a global index of learning quality. In a typical school year, the average student gains 20 to 50 points on the HLO scale, with better school systems experiencing more gains.55 For Cambodia, the quantity effect is given by the duration of full and partial school closures as reported by UNESCO along with the dropout-income elasticity for children enrolled in school. It assumes that 25 percent of students did not return to in-person education when schools reopened after the first shutdown (as reported by MoEYS and discussed above), but that all students—except those who dropped out because of income shocks—will return as part of the latest full reopening on November 1, 2021. Those 25 percent of students who did not return are assumed to have done so due to health concerns—not disengagement—and therefore are counted as having participated in remote learning alternatives at prevailing rates when the larger share of students returned to in-person education.56 Between the first school closure on March 8, 2020, and the full return to schools on November 1, 2021, 603 days elapsed. Not including academic breaks, 85 percent of student-days were spent out of school during this period. That amounts to 1.4 years of in-person education lost because of school closures under the intermediate and optimistic scenarios (figure S.10).57 For illustrative purposes, another 10 percent of the 2020/2021 school year is assumed to be lost under the pessimistic scenario due to another school closure. Figure S.10. A large share of the student population was not engaged in learning activities during school closures Share of students engaged in learning activities, by type, for the 2019/2020 and 2020/2021 academic years 100 80 60 Percent 40 20 0 Mar Jun Sep Dec Mar Jun Sep 2020 2021 In school Remote learning programs (online, TV, radio) Academic break Completing assignments Not engaged in education activities Sources: World Bank staff calculations using UNESCO, Global monitoring of school closures caused by COVID-19, November 30, 2021; World Bank, Living Standards Measurement Study (LSMS), and ID Poor surveys, 2020–2021. Note: Student populations, by grade and province, used to calculate shares are based on the 2018/2019 school year. The share of a school year lost is equal to the area of the chart above that is not coded “in school” divided by the duration of a standard school year and excluding the academic breaks. CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 57 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia The quality effect assumes a learning a learning gain of 30 HLO points per year. This is in line with the assumptions used by Azevedo and others (2021), which are themselves based on empirical patterns showing that better-performing school systems yield bigger learning gains over the course of a year.58 Learning losses due to school closures are mitigated by remote learning alternatives depending on student use and learning effectiveness.59 Although almost all students had access to some remote learning alternative (table S.3), relatively few of them took advantage of this access and regularly participated in remote learning (figure S.9). The intermediate and pessimistic scenario assumes an access rate of 19.7 percent—the average share of students who accessed at least one of three remote learning alternatives: online platforms, television, and radio. The optimistic scenario adds to that the average share of students who completed assignments from a teacher (without double counting), bringing the share to 30.2 percent. This is likely a conservative estimate given the declining trends observed.60 Determining the effectiveness of remote learning alternatives is more subjective since no formal assessments have been done and data are so scant. According to the survey administered in the early months of the lockdown, 62 percent of respondents thought they were learning less than when schools were open, implying that 38 percent thought they were learning as much. This value is almost certainly much too high for the entire period given the sharp declines in student participation; teacher, caregiver, and student reports that they were unprepared for remote learning; and subsequent research on the effectiveness of remote learning programs in high-income and developing countries. For this exercise, the optimistic scenario assumes that remote learning alternatives are 40 percent as effective as in-person education, the intermediate scenario assumes 30 percent, and the pessimistic scenario assumes 20 percent. These rates probably understate learning losses given the low amount of effort implied by the early needs-assessment survey.61 Earning losses The framework developed by Azevedo and others (2021) also allows for estimating expected earnings losses due to the pandemic. This is calculated using the decline in learning-adjusted years of schooling, the private returns to education, and expected earnings information from the International Labor Organization and World Bank.62 Around the world, each additional year of schooling increases a person’s annual earnings by about 9 percent. Country-specific values range considerably but are generally higher in developing countries than high-income countries because the former have fewer mean years of schooling and returns are diminishing. Cambodia’s private returns to education are 8.5 percent.63 Under the intermediate scenario, the average student in today’s cohort can expect to lose US$738 (PPP) in annual earnings because of lost learning during the COVID-19 pandemic—a decline of 12 percent from the baseline of US$6,077 (PPP). Under the optimistic scenario, average annual losses are US$694 (PPP), and under the pessimistic scenario they are US$801 (PPP). The present value of lifetime earnings lost because of the COVID-19 pandemic is US$31 billion in the intermediate scenario, US$30 billion in the optimistic scenario, and US$34 billion in the pessimistic scenario.64 CAMBODIA NEEDS TO STEM THE LEARNING LOSS AND BUILD BACK BETTER Cambodia has reopened its schools, but the pandemic and the government’s efforts to combat it severely harmed the country’s education system and its students. Few countries in the region closed their schools for such a long period of time. To mitigate learning losses, MoEYS offered a wide variety of distance learning programs, covering a broad array of subjects, targeted at various grade and skill levels, and sensitive to socioeconomic inequalities, minority status, and student disabilities. But it did not do a good enough job to prepare and guide students, teachers, and caregivers as they navigated remote learning on a wide scale for the first time. As a result, student participation was lower than desired, with lower-income households faring the worst. And for every hour that students invested, they 58 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia learned less than they would have in school. In sum, Cambodia experienced a massive loss of learning. Students who missed out—or, worse, dropped out—will earn substantially less in their lifetimes than they otherwise would have.65 There is much the government, school administrators, and teachers can do to help students avoid this grim future. The learning and earning loss estimates presented above assume that a lost year is lost forever. Instead, for example, a student who was in grade 5 when schools closed and is now returning with a fifth-grade learning level can invest extra years to make up for lost learning. Or, the government can invest extra time and resources, improve pedagogy, and better train and prepare teachers so students learn more in any given year. Either route could bridge the gap, so today’s cohort emerges with the same number of learning-adjusted years of schooling as expected before the pandemic. Supply- side actors, caregivers, and students alike must invest more, change behaviors, and redouble their efforts to simply break even, and prevent this cohort of students from suffering a disadvantage compared to past and future generations.66 Cambodia’s immediate need is therefore twofold: safely and effectively reopening schools while simultaneously improving the remote learning system in case schools are forced to shut down again. MoEYS has introduced robust safety and hygiene protocols in schools. Administrators and teachers must ensure they are enforced. Any community spread in schools would most likely result in another school closure. And, of course, teachers and administrators must return to the all-important task of educating students. They need to act quickly to prevent dropouts, assess student learning, and implement new techniques for learning recovery to get students back on track. Meanwhile, Cambodia needs to retain and strengthen its remote learning infrastructure. MoEYS officials have already announced that they will continue the various remote learning channels, which can be used to instruct students not in class on any given day under the new rotational system. In the future, when all students can return to school every day of the week, remote learning channels can supplement in-person learning. Alternatively, they could again become the primary means of teaching if schools are forced to close again. Beyond that, reopening teacher training colleges provides an opportunity to strengthen teacher training and preparation for both in-person and remote teaching with a focus on new teaching pedagogies to reverse learning loss. And the return of students allows an opportunity to poll them on what worked and what did not, with the goal of improving participation and learning under any scenario. As the situation stabilizes in the months and years ahead, Cambodia needs to “build back better,” improving its education system for the benefit of students and the economy. In this way, today’s cohort of students—and those that follow—can actually get ahead. The policy recommendations below focus on ensuring a safe and effective return to schools; improving remote learning programs to mitigate learning loss and insure against another shutdown; assessing student learning and improving pedagogy and instruction to help students catch up; and making long-term investments to improve Cambodia’s education system. Most of these recommendations are directed toward improving school systems and learning in the context of the pandemic. Others are part of a “build back better” agenda so that Cambodia emerges from this crisis stronger than it entered.67 Ensure a safe and effective return to schools Cambodia’s approach to reopening schools has promoted the health and safety of students and teachers. Officials prioritized geographic areas where risks are lower, rotated students on alternate days to reduce class size, imposed shifts in schools so there are fewer students and staff present at any given time, adjusted the physical arrangements of schools and classrooms to increase the capacity for social distancing, and adjusted school feeding programs to reduce congregations of students. CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 59 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia As long as COVID-19 remains a threat, a hybrid approach should be employed—rotating students so they spend half their time in class and half their time learning online or through other remote learning programs. Priority for full-time return to the classroom should be given to students in lower grades because remote learning alternatives are less effective at that level and the returns to education are higher. With local and school-specific contexts in mind, the following steps to safely and effectively implement this hybrid learning model should be taken: 1. Continue to prioritize the vaccination of teachers and school staff, conduct health checks upon entering schools, and require face masks and social distancing inside the classroom 2. Audit school health and safety policies, conduct inspections to ensure they are followed, and ensure teachers and administrators are trained and prepared to enforce health protocols 3. Allow students with ongoing health concerns to continue studying at home instead of returning to the classroom 4. Group students in separate pods that rotate together through the school day or school week and ensure students from different pods do not mix to reduce the chance of transmission 5. Establish clear procedures for dealing with suspected positive cases, communication mechanisms with local health authorities, and standard operating procedures for any necessary health interventions. Improve remote learning programs to mitigate learning loss and insure against another shutdown The COVID-19 pandemic is not over. Although Cambodia’s students are returning to school, the hybrid approach MoEYS is pursuing and the threat of future school closures means the remote learning programs launched in 2020 are still very relevant. However, the country’s experience since March 2020 indicates room for improvement. ICT and infrastructure proved to be a bigger obstacle than access and connectivity rates would imply. Heavy internet use during the pandemic tested the limits of networks in Cambodia. Students and teachers alike experienced internet outages during synchronous lectures and teaching sessions. Many families found it prohibitively expensive to connect. And others were restricted by competing demand for devices or time at home. At the national level, Cambodia has low prices and high data usage. This should make it relatively inexpensive from a fiscal standpoint to extend these benefits to lower-income families. With local contexts and the needs of target populations in mind, the following steps should be taken to help students reliably connect to remote learning: nsure teachers have appropriate ICT and reliable, high-speed connectivity 1. E Strengthen non-internet-based alternatives for remote locations, especially paper-based options 2. Build upon the video offerings already available to develop integrated and comprehensive massive 3. open online courses (MOOCs) for core curriculums that can be delivered cheaply at a large scale. Low digital literacy, unfamiliar pedagogy and distance learning practices, and increased stress from managing new modes of learning and competing demands at home severely undermined the quality of instruction and students’ ability to learn remotely. With local contexts, grade-level requirements, and teacher comfort levels in mind, the following steps should be taken to improve pedagogy, teacher performance, and student learning: istribute books, supplementary reading, and other basic learning materials to students 1. D Encourage teachers to provide learning support to students and caregivers through phone calls or 2. social media 60 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia evelop higher-quality programming for populations whose first language is not Khmer, and engage 3. D with community leaders and educators to encourage its use Develop and implement effective remote pedagogy and appropriate training and support programs 4. for teachers Ensure teachers and school directors receive digital literacy training 5. Ensure that in-person and online learning complement each other by encouraging students to read, 6. watch lectures, and study at home, and attend class for discussion and presentations. Assess student learning and improve pedagogy and instruction to help students catch up Learning losses are heterogenous across provinces, schools, and social groups. The first step in moving forward is determining where students stand. Schools at all levels need to administer systematic learning tests to determine what students know, understand, and can do relative to what had been expected prior to the pandemic. Learning assessments in the classroom will enable teachers to adjust their instruction and provide constructive feedback to students. Systemwide assessments can inform resource allocation. Teaching at the wrong level will prevent students from catching up and encourage them to drop out. And failing to allocate resources where they are needed most threatens to exacerbate inequality. Schools then need to monitor student progress with regular, low-risk assessments in the months and years that follow to keep them on track.68 With local contexts, student needs, and national learning goals in mind, the following steps should be taken to properly assess student learning: 1. Distribute guidelines to teachers on administering, scoring, and interpreting learning assessments 2. Soon after schools reopen, administer low-stakes exams to determine what students know, understand, and can do—at least in core subjects—and measure that against pre-pandemic expectations 3. Use classroom assessments to monitor progress throughout the school year toward specific learning goals and adjust curriculums, pacing, and resourcing as needed 4. Conduct large-scale diagnostic assessments of all students in all subjects during the school year and at the end of the school year to inform policymaking and resource allocation 5. Develop a post-pandemic student promotion policy and strategy and communicate it to teachers, students, and caregivers. MoEYS already plans to increase in-person class time at all grade levels to make up learning losses.69 Further initiatives should be based on the results of the systematic learning assessments, including adjusting pedagogy and reallocating resources, so that they are aligned with the specific needs of returning students. Disadvantaged students, for example, are likely to have experienced the greatest learning losses because of their inability to access or make use of alternative learning modalities. They will therefore need additional support. With the results of learning assessments in mind, the following steps should be taken to adjust pedagogy and reallocate resources: dentify at-risk students and schedule check-ins with caregivers 1. I Create a structured learning plan with clear direction and realistic expectations 2. Develop standardized, detailed lesson plans for core subjects at the national level that can be shared 3. with teachers Implement remedial learning programs to help students catch up 4. Prioritize foundational skills—especially basic literacy and numeracy—since learning more advanced 5. topics and concepts depends on foundational skills. CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 61 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia Make long-term investments to improve Cambodia’s education system When actions are underway to address the immediate needs of students and educators, Cambodia can begin to consider the future of learning in the country. Despite huge progress over past decades, public education in Cambodia still faces major challenges. Budget allocations to public education remain low by international and regional standards, despite recent increases to support teacher salaries. Funds are not clearly linked to desired results. Performance is not adequately monitored. And existing accountability mechanisms are not effective. As a result, teacher quality remains low, and students continue to perform poorly on national and international assessments. MoEYS’s medium- and long-term priorities include improving the quality of education and strengthening leadership and management. Doing so will support the government’s Vision 2030 agenda and Phase 4 of the Rectangular Strategy. These priorities are reflected in the ministry’s Continuous Professional Development (CPD) and Career Promotion (CP) guidelines, which were approved in October and launched on November 1, 2021, for implementation by central and subnational officials. The next steps are to integrate the Public Financial Management Reform Program into the Education Strategic Plan, develop a supporting Public Investment Program, and ensure information systems and policies are in place to manage implementation. With the goal of improving learning for current and future students, the following reforms should be pursued: mprove budget efficiency, so that funds allocated to education achieve their intended purpose 1. I Ensure the next Education Strategic Plan is a results-based sector strategy that links education priorities 2. and service targets with budget support and performance metrics, including implementation of the CPD and CP guidelines Develop and implement a Public Investment Program that directs funding from the government and 3. development partners to achieve the results laid out by the Education Strategic Plan Modernize the education management information system to support results-based performance 4. monitoring and evaluation and support the implementation of the Digital Economy and Society Framework Develop a policy on school-based management that enables schools and communities to respond 5. quickly to emerging needs, including maintaining teaching and learning during future school closures Require schools to collect and report data on school, classroom, and student performance to 6. subnational and national levels using off-the-shelf software Scale up efforts to engage parents and communities in the education process, including through 7. providing guidance on remote learning, ensuring paper-based assignments are distributed during school closures, and joining online lessons and serving as a teacher assistant for preschool and early grade primary school. 62 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 ANNEX. SELECTED INDICATORS SELECTED INDICATORS 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 E 2021 F INCOME AND ECONOMIC GROWTH GDP growth (annual %) 6.1 7.1 7.3 7.4 7.1 7.0 6.9 7.0 7.5 7.1 -3.1 2.2 GDP per capita growth (annual %, real) 4.5 5.4 5.6 5.6 5.4 5.3 5.3 5.4 5.9 5.5 -4.4 0.9 GDP per capita (US$, nominal) 812.9 892 950 1,028 1,100 1,175 1,270 1,381 1,506 1,640 1,548 1,619 Private Consumption growth (annual %) 8.8 10.4 4.7 5.6 4.6 9.4 5.8 3.7 3.0 7.0 -0.8 1.2 Gross Investment ( % of nominal GDP) 16.2 16.0 17.4 18.7 20.9 21.4 21.7 21.9 22.6 23.4 23.7 27.6 Gross Investment - Public ( % of nominal GDP)1 9.6 10.7 9.1 9.1 8.2 6.9 6.7 6.8 6.7 7.7 11.4 10.8 MONEY AND PRICES Inflation, consumer prices (annual %, period average)2 2.6 3.4 1.4 2.2 1.2 1.8 3.5 3.3 3.1 3.2 2.9 3.5 Broad Money (% of GDP)1 41.6 39.1 50.1 55.5 67.1 72.4 79.2 88.2 100.7 107.7 137.5 142.0 1 Domestic Credit to the Private Sector ( % of GDP) 27.6 28.3 38.7 52.0 62.7 74.3 81.7 86.7 99.6 114.2 136.0 153.7 Nominal Exchange Rate (local currency per USD) 4,044.0 4,016.0 4,033.0 4,027.0 4,030.0 4,025.0 4,058.0 4,062.0 4,067.0 4,070.0 4,077.4 4,070.0 Real Exchange Rate Index (2015=100) 98.1 94.3 93.3 92.6 94.7 100.0 101.9 103.2 99.7 101.0 96.8 98.9 FISCAL Revenue (% of GDP) 17.7 17.6 17.7 18.2 20.0 19.7 20.9 21.9 23.8 27.0 23.9 20.7 Expenditure (% of GDP) 21.0 23.0 21.9 21.4 21.9 20.2 21.1 22.7 23.4 25.5 28.4 26.7 Interest Payments (% of GDP) 0.3 0.3 0.5 0.7 0.7 0.3 0.4 0.4 0.4 0.4 0.6 0.5 Non-Interest Expenditure (% of GDP) 20.7 22.7 21.4 20.7 21.2 19.9 20.7 22.3 23.0 25.1 27.8 26.2 Overall Fiscal Balance (% of GDP) -3.3 -5.4 -4.2 -3.2 -1.9 -0.5 -0.2 -0.8 0.4 1.5 -4.5 -6.1 Primary Fiscal Balance (% of GDP) -3.0 -5.1 -3.7 -2.5 -1.2 -0.2 0.2 -0.4 0.8 1.9 -3.9 -5.6 General Government Debt (% of GDP) 28.7 29.7 31.5 31.7 31.9 31.2 29.1 30.0 28.4 28.1 35.7 36.0 1 External Public Debt (% of GDP) 27.1 26.9 30.4 31.5 31.4 31.2 29.1 30.2 28.7 28.1 35.7 36.0 EXTERNAL ACCOUNTS Export growth, G&S (nominal US$, annual %) 22.9 11.4 16.0 16.8 10.3 7.5 9.0 9.4 12.3 8.5 -5.1 15.9 Import growth, G&S (nominal US$, annual %) 19.1 11.4 14.2 16.9 8.8 7.6 9.0 7.8 9.3 17.4 -6.7 41.2 Merchandise exports (% of GDP) 38.3 38.8 41.6 44.6 45.4 45.4 45.5 45.2 46.0 46.0 48.7 57.8 Merchandise imports (% of GDP) 50.4 50.5 53.7 57.5 57.5 57.3 56.9 55.6 55.1 54.6 66.0 90.8 Services, net (% of GDP) 6.8 6.3 7.3 7.8 7.7 7.5 7.0 7.0 7.4 8.8 -0.4 -0.4 Current account balance (current US$ millions) -1,165.3 -1,309.3 -1,390.7 -1,489.3 -1,899.7 -1,680.6 -1,756.6 -2,140.5 -2,180.1 -4,107.7 -2,125.1 -7,370.0 Current account balance (% of GDP) -10.0 -10.1 -9.9 -9.6 -11.3 -9.2 -8.8 -9.7 -8.9 -15.2 -8.2 -26.9 Foreign Direct Investment, net inflows (% of GDP) 11.9 11.6 13.9 13.0 10.5 9.5 12.0 12.1 12.6 13.2 13.5 12.1 External debt, total (% of GDP)1 35.6 36.2 47.9 49.9 49.7 52.2 50.2 51.5 55.0 56.6 .. .. Multilateral debt (% of total external debt)1 .. .. .. .. .. .. .. .. .. .. .. .. Debt service ratio (% of exports goods and non-factor 1.1 4.0 6.0 5.7 5.4 5.1 5.1 6.2 6.7 6.9 .. .. 1 services) POPULATION, EMPLOYMENT AND POVERTY Population, total (millions) 14.3 14.5 14.8 15.0 15.3 15.5 15.8 16.0 16.2 16.5 16.7 16.9 Population Growth (annual %) 1.6 1.6 1.6 1.7 1.7 1.6 1.6 1.5 1.5 1.5 1.4 1.4 Unemployment Rate1 0.8 0.6 0.5 0.4 0.7 0.4 0.7 0.7 0.7 0.7 0.7 .. Inequality - Gini Coefficient1 .. .. .. .. .. .. .. .. .. .. .. .. 1 Life Expectancy 66.6 67.0 67.5 67.9 68.3 68.6 69.0 69.3 69.6 .. .. .. OTHER GDP (current LCU, millions) 47,047,985.0 52,068,693 56,616,800 62,219,524 67,740,436 73,422,702 81,241,866 89,830,525 99,544,275 109,916,799 105,522,011 111,660,573 GDP (current US$, millions) 11,634.0 12,965 14,038 15,451 16,809 18,242 20,020 22,115 24,476 27,030 25,880 27,435 GDP per capita LCU (real) 2,124,292.2 2,238,619 2,363,486 2,495,841 2,630,660 2,769,140 2,915,146 3,071,748 3,252,348 3,431,774 3,279,153 3,365,284 Doing Business Rank3 .. .. .. .. .. .. .. .. .. 144 .. .. Human Development Index Ranking4 143.0 143 145 144 144 146 146 145 144 144 .. .. CPIA (overall rating)1 3.4 3.4 3.5 3.4 3.4 3.4 3.4 3.4 3.4 3.4 .. .. Economic Management1 4.0 3.8 3.8 3.8 3.8 4.0 4.0 4.0 4.2 4.2 .. .. 1 Structural Policies 3.3 3.5 3.7 3.7 3.7 3.5 3.5 3.3 3.3 3.3 .. .. 1 Policies for Social Inclusion and Equity 3.4 3.5 3.5 3.4 3.4 3.4 3.4 3.4 3.4 3.5 .. .. 1 Public Sector Management and Institutions 2.7 2.8 2.8 2.8 2.8 2.7 2.7 2.7 2.6 2.6 .. .. CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Notes: “..” indicates not available. E = estimate, F = forecast. Data from MFMOD unless otherwise noted 1/ World Development Indicators Database and World Bank Staff Estimates Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia 2/ World Bank GEM database; MRV = Most recent value 3/ This indicator is ranked out of 190 countries (Doing Business 2019). Data are presented for survey year instead of publication year. Doing Business rankings change over time, due to both methodology and policy changes. 63 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. Sources: MFMOD Database, World Bank WDI and GEM databases, IMF. Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia Notes 1 Only 11 countries did not fully or partially close schools in February or March 2020: Burundi, Belarus, Brunei Darussalam, Cabo Verde, Nauru, Singapore, Sierra Leone, Suriname, Tajikistan, Turkmenistan, and South Africa. 2 World Bank, “Simulating the Potential Impacts of COVID-19 School Closures on Schooling and Learning Outcomes: A Set of Global Estimates,” June 2020, https://thedocs.worldbank.org/en/doc/ 798061592482682799-0090022020/original/covidandeducationJune17r6.pdf. 3 World Bank, “Cambodia COVID-19 Emergency Response Project,” not dated; World Health Organization, “Cambodia: Coronavirus Disease 2019 (COVID-19) Situation Report #32,” February 8, 2021. 4 MoEYS, Cambodia Education Response Plan to COVID-19 Pandemic, July 2020, p. 6. The number of affected schools, students, and teachers does not include tertiary/higher education and nonformal education institutions. 5 MoEYS, Cambodia Education Response Plan to the COVID-19 Pandemic, July 2020, pp. 6–9. 6 World Health Organization, “Cambodia: Coronavirus Disease 2019 (COVID-19) Situation Report #32,” February 8, 2021. 7 Ministry of Education Youth and Sport, “Notification of School Closure at Public and Private Schools Nationwide,” March 20, 2021, https://policypulse.org/wp-content/uploads/2021/03/162882432_ 4546793305347248_ 8358918747191347960_o.jpg. 8 World Bank, Johns Hopkins University, and UNICEF, COVID-19 Global Education Recovery Tracker, July 5, 2021 and August 31, 2021, https://www.covideducationrecovery.global/maps/education-status/. 9 World Bank, Johns Hopkins University, and UNICEF, COVID-19 Global Education Recovery Tracker, July 5, 2021 and August 31, 2021, https://www.covideducationrecovery.global/maps/education-status/. Within developing EAP, Malaysia, and the Philippines also remained fully remote. 10 UNESCO, COVID-19 Education Response, November 30, 2021, http://covid19.uis.unesco.org/data/. The Pacific Island States were protected from the health impact of the coronavirus given their isolation. Still, all but Nauru closed schools in early 2020, and only Fiji closed them again in 2021. 11 Haver, “Visitor arrivals in Cambodia (Persons, monthly, not seasonally adjusted)”, accessed November 2021. 12 World Bank, “Cambodia Economic Update: Road to Recovery,” June 2021, https://documents1.worldbank. org/curated/en/788321624038286598/pdf/Cambodia-Economic-Update-Road-to-Recovery.pdf. 13 The Oxford Government Response Tracker, known as the stringency index, measures common policy responses governments have taken in response to the COVID-19 pandemic. It comprises 17 indicators, such as school closures and travel restrictions. The Google mobility index measures the physical movement of people at specific locations using anonymized data provided by mobile phone apps, including Google maps. Subindexes comprise retail, grocery, transit, park, and workplace locations. Values compare activity at a given location against a pre-pandemic benchmark, defined as the median value for that location over the period January 3–February 6, 2020, and are specific to the day of the week. 14 Staff calculations using data from Johns Hopkins University 2021, Google 2021, and Oxford 2021. 15 World Bank, “Cambodia Economic Update,” May 2021. 16 Asian Development Bank, Learning and Earning Losses from COVID-19 School Closures in Developing Asia: Special topic of the Asian Development Outlook 2021, April 2021, p. 7. The increase in the dropout rate is computed by applying the decline in 2020 GDP per capita to the income elasticity of dropout rates. 17 MoEYS, Public Education Statistics & Indicators: 2019–202, January 2020; MoEYS, Public Education Statistics & Indicators: 2020–2021, March 2021. 64 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia 18 MoEYS, Education Sector Working Group, and national and international partners, Cambodia COVID-19 Joint Education Needs Assessment, March 2021, pp. 17–19; UNESCO, UNICEF, and World Bank, “Survey on National Education Responses to COVID-19 School Closures,” 3rd Iteration (February–April 2021), http://tcg.uis. unesco.org/survey-education-covid-school-closures/. 19 World Food Program, HungerMap: Cambodia, August 2021, https://hungermap.wfp.org/. 20 World Bank, World Development Report 2018: Learning to Realize Education’s Promise, pp. 88–90. 21 World Bank, High-Frequency Household Surveys In Brief, various countries, May–June 2020, https://blogs. worldbank.org/eastasiapacific/how-hard-are-families-hit-covid-19-crisis-six-insights-our-household-surveys- east. 22 MoEYS, Education Sector Working Group, and national and international partners, Cambodia COVID-19 Joint Education Needs Assessment, March 2021, p. 42. ID Poor is Cambodia’s official poverty identification program and is used to target programs that support the poor. 23 MoEYS, Education Sector Working Group, and national and international partners, Cambodia COVID-19 Joint Education Needs Assessment, March 2021, p. 14. 24 World Bank, World Development Report 2018: Learning to Realize Education’s Promise, 2019, p. 3; USAID, Early Grade Reading Barometer: Cambodia, 2019, https://earlygradereadingbarometer.org/cambodia-2019/countries/ home. 25 Deon Filmer, Halsey Rogers, Noam Angrist, and Shwetlena Sabarwal, “Learning-adjusted years of schooling (LAYS): Defining a new macro measure of education,” Economics of Education Review, Volume 77 (August 2020), https://doi.org/10.1016/j.econedurev.2020.101971. 26 Human Capital Project, “Human Capital Index 2020: Cambodia,” October 2020, https://databank.worldbank. org/data/download/hci/HCI_2pager_KHM.pdf. 27 World Bank, “Cambodia: Learning Poverty Brief,” October 2019, https://thedocs.worldbank.org/en/ doc/800771571223443681-0090022019/original/EAPEACMMKHMLPBRIEF.pdf. 28 World Bank, “Guidance Note: Remote Learning & COVID-19,” April 7, 2020, https://documents1.worldbank. org/curated/en/531681585957264427/pdf/Guidance-Note-on-Remote-Learning-and-COVID-19.pdf. 29 MoEYS, Education Sector Working Group, and national and international partners, Cambodia COVID-19 Joint Education Needs Assessment, March 2021, pp. 17–19; UNESCO, UNICEF, and World Bank, “Survey on National Education Responses to COVID-19 School Closures”, 2nd Iteration (July–October 2020), http:// tcg.uis.unesco.org/survey-education-covid-school-closures/. 30 UNESCO, COVID-19 Education Response, October 2021, http://covid19.uis.unesco.org/global-monitoring- school-closures-covid19/country-dashboard/; MoEYS, Education Sector Working Group, and national and international partners, Cambodia COVID-19 Joint Education Needs Assessment, March 2021, pp. 17–19. 31 MoEYS, Education Sector Working Group, and national and international partners, Cambodia COVID-19 Joint Education Needs Assessment, March 2021, p. 17. 32 MoEYS, Education Sector Working Group, and national and international partners, Cambodia COVID-19 Joint Education Needs Assessment, March 2021, pp. 10, 78–73. 33 UNESCO, UNICEF, and World Bank, “Survey on National Education Responses to COVID-19 School Closures,” 3rd Iteration (February–April 2021), http://tcg.uis.unesco.org/survey-education-covid-school- closures/. 34 MoEYS, Education Sector Working Group, and national and international partners, Cambodia COVID-19 Joint Education Needs Assessment, March 2021, pp. 66–67, 81–83. 35 MoEYS, Education Sector Working Group, and national and international partners, Cambodia COVID-19 Joint Education Needs Assessment, March 2021, pp. 66–71; Asian Development Bank, Learning and Earning Losses from COVID-19 School Closures in Developing Asia: Special topic of the Asian Development Outlook 2021, April 2021, pp. 2–4. CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 65 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia 36 The share of households with radio (not shown) increased from 32 percent to 42 percent during 2013–17. 37 ITU 2021; UN-OHRLLS, Leveraging Investments in Broadband for National Development: The Case of Cambodia, 2017. High data usage is also attributable to the difficulty of typing in Khmer due to the large number of characters, which makes users prefer voice messages. 38 MoEYS, Education Sector Working Group, and national and international partners, Cambodia COVID-19 Joint Education Needs Assessment, March 2021, p. 56–59. 39 MoEYS, Education Sector Working Group, and national and international partners, Cambodia COVID-19 Joint Education Needs Assessment, March 2021, p. 20. 40 Staff calculations using data from World Bank LSMS and ID Poor surveys, 2020–2021. 41 Staff calculations using data from World Bank LSMS and ID Poor surveys, 2020–2021. 42 MoEYS, YouTube channel, https://www.youtube.com/c/MinistryofEducationYouthandSportCambodia/. 43 Staff calculations using data from World Bank LSMS and ID Poor surveys, 2020–2021. 44 João Pedro Azevedo, Amer Hasan, Diana Goldemberg, Syedah Aroob Iqbal, and Koen Geven, “Simulating the Potential Impacts of COVID-19 School Closures on Schooling and Learning Outcomes: A Set of Global Estimates,” World Bank, June 2020, pp. 5–6. 45 Engzell, Frey, and Verhafgen 2020; Tomasik, Helbling, and Moser 2021. 46 Niculina Nae 2021. 47 Hugues Champeaux, Lucia Mangiavacchi, Francesca Marchetta, and Luca Piccoli, “Learning at Home: Distance Learning Solutions and Child Development during the COVID-19 Lockdown,” November 2020. 48 Joana Maldonado and Kristof De Witte, “The effect of school closures on standardized student test outcomes,” British Educational Research Journal, September 2020. 49 Noam Angrist, Simeon Djankov, Pinelopi Goldberg, and Harry A. Patrinos , “Measuring human capital using global learning data,” Nature 592: 403–408, 2021. 50 World Bank, “Pandemic Threatens to Drive Unprecedented Number of Children into Learning Poverty,” Press Release, October 29, 2021. 51 UNESCO, UNICEF, and World Bank, “Survey on National Education Responses to COVID-19 School Closures,” 3rd Iteration (February–April 2021), http://tcg.uis.unesco.org/survey-education-covid-school- closures/. According to the survey, education ministries in Mongolia, Thailand, and Vietnam have conducted formal studies or assessments on the effectiveness of remote learning programs. 52 MoEYS, Education Sector Working Group, and national and international partners, Cambodia COVID-19 Joint Education Needs Assessment, March 2021, p. 20. 53 João Pedro Azevedo, Amer Hasan, Diana Goldemberg, Syedah Aroob Iqbal, and Koen Geven, “Simulating the Potential Impacts of COVID-19 School Closures on Schooling and Learning Outcomes: A Set of Global Estimates,” World Bank, June 2020, pp. 14–15, 18. 54 Asian Development Bank, Learning and Earning Losses from COVID-19 School Closures in Developing Asia: Special topic of the Asian Development Outlook 2021, April 2021, p. 11. 55 João Pedro Azevedo, Amer Hasan, Diana Goldemberg, Syedah Aroob Iqbal, and Koen Geven, “Simulating the Potential Impacts of COVID-19 School Closures on Schooling and Learning Outcomes: A Set of Global Estimates,” World Bank, June 2020. 56 The alternative scenario—that those 25 percent of students did not return because they were no longer engaged in education activities whatsoever—would result in more learning loss. 57 The data used to calculate school closures differ slightly from that reported by UNESCO for early March 2021, when schools in Phnom Penh and Kandal province were closed because of the “February 20 incident,” but UNESCO reported the country’s schools as “fully open.” 66 CAMBODIA ECONOMIC UPDATE | DECEMBER 2021 Special focus: The Impact of the COVID-19 Pandemic on Learning and Earning in Cambodia 58 Azevedo and others (2021) assume school productivity rates of 20 HLO points per year for low-income countries, 30 for lower-middle, 40 for upper-middle, and 50 for high-income countries. It is not possible to calculate a value specific to Cambodia, since it participates in only one internationally comparable learning assessment by which Cambodia can be indexed to other countries in the HLO database—the Early Grade Reading Assessment (EGRA), administered in grade 1 or grade 2—and therefore change over time cannot be observed. 59 The original model from Azevedo and others (2021) calculates this as a product of three components: (1) government supply (or expected coverage) of remote learning alternatives (as a percent of the student population), (2) the ability of students to access the alternatives (as a percent of students who can access the government-supplied alternatives), and (3) the effectiveness of the alternative (as a percent of the effectiveness of in-person education). This analysis uses the high-frequency survey results—interpolated between observations—to calculate participation in remote learning alternatives. The result is equivalent to the product of government supply and ability of students to access the remote alternatives from the framework developed by Azevedo and others (2021) and has the advantage of being grounded in country-specific data. 60 The data points used comprise four of the five high-frequency surveys conducted, excluding the fourth wave, when some students were back in school, and the early survey conducted for the joint needs assessment. 61 Education Sector Working Group, and national and international partners, Cambodia COVID-19 Joint Education Needs Assessment, March 2021, pp. 60–63. 62 World Bank, “Simulating the Potential Impacts of COVID-19 School Closures on Schooling and Learning Outcomes: A Set of Global Estimates,” June 2020, p. 11, https://thedocs.worldbank.org/en/ doc/798061592482682799-0090022020/original/covidandeducationJune17r6.pdf. 63 George Psacharopoulos and Harry Antony Patrinos, “Returns to Investment in Education: A Decennial Review,” World Bank Policy Research Paper 8402, https://openknowledge.worldbank.org/bitstream/ handle/10986/29672/WPS8402.pdf. 64 The present value of annual earnings lost for all students is calculated using a working life of 45 years, a discount rate of 3 percent, and is adjusted by the adult survival rate and average human capital utilization. 65 UNESCO, UNICEF, World Bank, and World Food Programme, “Framework for Reopening Schools,” April 2020, https://docs.wfp.org/api/documents/WFP-0000115123/download/?_ga=2.104979077.725171133. 1615560510-699640208.1615560510. 66 World Bank, “Accelerating Learning Recovery,” September 2021, https://thedocs.worldbank.org/en/ doc/7545f861c6b77690382bfc206916773a-0200022021/related/Recovery.pdf. 67 More comprehensive guidance, targeted to developing countries in general, is available from the World Bank, UN, and other international organizations and bilateral donors, including: UNESCO, UNICEF, World Bank, World Food Programme, and the United Nations High Commissioner for Refugees (UNHCR), Framework for Reopening Schools, April 2020, https://unesdoc.unesco.org/ark:/48223/pf0000373348; USAID, Returning to Learning During Crises Toolkit, 2021, https://www.edu-links.org/resources/returning-learning-during- crises-toolkit; World Bank, Policy Actions for School Reopening and Learning Recovery, May 5, 2021, https://www. worldbank.org/en/news/factsheet/2021/04/30/notes-on-school-reopening-and-learning-recovery; and World Bank, Guidance Note on Using Learning Assessment in the Process of School Reopening, November 21, 2020, https://documents1.worldbank.org/curated/en/856951606239586214/pdf/Guidance-Note-on-Using- Learning-Assessment-in-the-Process-of-School-Reopening.pdf. 68 Diego Luna Bazaldua, Victoria Levin, Julia Liberman, “Guidance note on using learning assessment in the process of school reopening,” World Bank, November 21, 2020, https://documents.worldbank.org/en/ publication/documents-reports/documentdetail/856951606239586214/guidance-note-on-using-learning- assessment-in-the-process-of-school-reopening. 69 UNESCO, UNICEF, and World Bank, “Survey on National Education Responses to COVID-19 School Closures,” 2nd Iteration (July–October 2020), http://tcg.uis.unesco.org/survey-education-covid-school- closures/. 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