CAMBODIA ECONOMIC UPDATE CAMBODIA IN THE TIME OF COVID-19 SPECIAL FOCUS Teacher Accountability and Student Learning Outcomes MAY 2020 CAMBODIA ECONOMIC UPDATE MAY 2020 Cambodia in the time of Covid-19 TABLE OF CONTENTS TABLE OF CONTENTS ACKNOWLEDGEMENTS���������������������������������������������������������������������������������������������������������� 1 ABBREVIATIONS����������������������������������������������������������������������������������������������������������������������� 2 EXECUTIVE SUMMARY������������������������������������������������������������������������������������������������������������ 3 RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK����������������������������������������������11 Recent developments������������������������������������������������������������������������������������������������������������11 Economic activity quickly diminished due to the global COVID-19 outbreak�����������������������������������������11 While Cambodia has avoided a health crisis so far, it has not been immune from the economic crisis sweeping the global economy�����������������������������������������������������������������������������������������12 The tourism and hospitality industry has faced both a structural slowdown and severe impacts of the COVID-19 outbreak�����������������������������������������������������������������������������������������������������12 The COVID-19 pandemic has triggered an unprecedented export demand shock����������������������������������14 Garment, footwear, and travel goods export growth decelerated quickly in the first quarter of 2020������15 Exports of travel goods (and other textile products) outpaced those of footwear in 2019��������������������15 The United States became the largest market for Cambodia’s combined garment, travel goods, and footwear exports�������������������������������������������������������������������������������������������������������������������������������������������15 The Japanese market appears promising for Cambodia’s exports of electronic and vehicle parts and accessories �����������������������������������������������������������������������������������������������������������������������������������������������������16 Approved FDI project value contracted by 52.2 percent in the first two months of 2020���������������������17 The majority of approved FDI continued to go to the construction and real estate sector�������������������17 In early 2020, construction activity weakened significantly due to the global COVID-19 outbreak �����17 The global COVID-19 outbreak disrupted domestic demand and consumption�������������������������������������18 The current account deficit remained stable and fully financed by FDI last year�������������������������������������19 FDI inflows decelerated in 2019������������������������������������������������������������������������������������������������������������������������19 The agriculture sector’s contribution to GDP growth contracted in 2019�������������������������������������������������19 The agriculture sector is unlikely to be able to substantially absorb laid-off workers from the tourism and export sectors �������������������������������������������������������������������������������������������������������������������������20 Returning migrant workers will put further pressure on Cambodia’s shrinking job market��������������������20 Reflecting the impact of the COVID-19 outbreak, inflation was subdued in the first quarter of 2020����21 Broad money growth declined as foreign currency deposits slowed�����������������������������������������������������������21 Pressure on the exchange rate is rising�������������������������������������������������������������������������������������������������������������24 By the end of 2019, growth of (net) bank credit to businesses eased for the first time since mid-2018������������������������������������������������������������������������������������������������������������������������������������������������������25 Rising domestic bank credit to the construction, real estate, and mortgage sector, however, continued����������������������������������������������������������������������������������������������������������������������������������������������25 Implications for domestic revenues �����������������������������������������������������������������������������������������������������������������26 Revenue collection peaked last year������������������������������������������������������������������������������������������������������������������27 iv CAMBODIA ECONOMIC UPDATE | MAY 2020 TABLE OF CONTENTS Expenditure performance also accelerated last year���������������������������������������������������������������������������������������27 In response to the COVID-19 outbreak, the 2020 budget was announced by the authorities as an austerity budget������������������������������������������������������������������������������������������������������������������������������������������27 To finance the widening fiscal deficit, public debt is expected to rise to 35 percent of GDP by 2022�����28 China remains the largest creditor, accounting for almost half of Cambodia’s outstanding debt����������28 Outlook��������������������������������������������������������������������������������������������������������������������������������� 29 The economy is being hit hard by the COVID-19 outbreak������������������������������������������������������������������������29 Under the baseline scenario, real growth is projected to contract by 1.0 percent in 2020�����������������������29 Under the downside scenario, real GDP is projected to contract by 2.9 percent in 2020������������������������31 Policy options������������������������������������������������������������������������������������������������������������������������31 TEACHER ACCOUNTABILITY AND STUDENT LEARNING SPECIAL FOCUS:  OUTCOMES����������������������������������������������������������������������������������������������� 35 Case Studies of Selected School Models������������������������������������������������������������������������������ 35 Strengthening Accountability to Improve the Quality of Education����������������������������������������������������������35 Introduction����������������������������������������������������������������������������������������������������������������������������������������������������������35 Efforts to bring the education sector to the next level����������������������������������������������������������������������������������37 1. Access to education has been expanded ����������������������������������������������������������������������������������������������������37 2. Salaries for teachers and education staff have been increased ���������������������������������������������������������������37 3. However, student learning outcomes have not improved�����������������������������������������������������������������������38 4. New Generation School introduced a new level of accountability and autonomy and quality of education services������������������������������������������������������������������������������������������������������������������������40 5. School-Based Management improved accountability for community���������������������������������������������������42 Main challenges to improving student learning outcomes in public schools���������������������������������������������44 1. School governance and accountability to the community remained ineffective����������������������������������44 2. Teacher incentives are not based on performance, and that may lead to a widening gap in education quality between public and private schools�������������������������������������������������������������������������47 3. Both the surplus and shortage of teachers negatively affect student learning�������������������������������������50 4. Low level of government investment for professional development of school directors and teachers�����������������������������������������������������������������������������������������������������������������������������������������������������51 CONCLUSION��������������������������������������������������������������������������������������������������������������������������� 53 ADVANTAGES, DISADVANTAGES, AND POLICY OPTIONS FOR EACH ANNEX 1:  SCHOOL MODEL �������������������������������������������������������������������������������������������������� 54 ANNEX 2: CAMBODIA’S KEY INDICATORS UNDER THE BASELINE SCENARIO����� 56 BIBLIOGRAPHY������������������������������������������������������������������������������������������������������������������������ 57 ADDITIONAL REFERENCES������������������������������������������������������������������������������������������������� 58 CAMBODIA ECONOMIC UPDATE | MAY 2020 v ACKNOWLEDGEMENTS ACKNOWLEDGEMENTS The May 2020 Cambodia Economic Update Financial Management and Service Delivery (CEU) was prepared by Sodeth Ly, with contributed by Australia and the European Union contributions from Claire Honore Hollweg, for the preparation of the special focus section of Sokbunthoeun So, Donna Andrews, Khy Touk, this report. and Sokunpanha You. Other contributors include The CEU, produced biannually, provides Fata No, Ekaterine Vashakmadze, Simeth Beng, up-to-date information on macroeconomic Pisith Phlong, Linna Ky, Kimsun Tong, and developments in Cambodia. It is distributed and Runsinarith Phim. Saroeun Bou and Chankesey discussed widely including among Cambodian Heav helped with the press release, logistics authorities, development partners, the private support, web display, and dissemination events. sector, think tanks, civil society organizations, and The team worked under the overall guidance academia. of Deepak Mishra. The team is grateful for For information about the World Bank and its the advice and comments provided by Inguna activities in Cambodia, please visit our website at Dobraja, Mariam Sherman, and Hassan Zaman. www.worldbank.org/cambodia. Several colleagues provided comments on the draft version including Aaditya Mattoo, Andrew To be included in the email distribution list of Mason, Ekaterine Vashakmadze, and Ergys the CEU and related publications, please contact Islamaj and Vera Kehayova. Chankesey Heav (cheav@worldbank.org). For questions on the contents of this publication, The team is grateful to the Cambodian authorities, please contact Saroeun Bou (sbou@worldbank. particularly the Ministry of Economy and org). Finance and the National Bank of Cambodia, for their cooperation and support. The report also The findings, interpretations, and conclusions benefited from the advice, comments, and views expressed in this report do not necessarily reflect of various stakeholders in Cambodia, including its the views of the Executive Directors of the enthusiastic readers and critics. World Bank or the governments they represent. The World Bank does not guarantee the accuracy The team also gratefully acknowledges financing of the data included in this work. from a Multi-Donor Trust Fund on Public 1 CAMBODIA ECONOMIC UPDATE | MAY 2020 ABBREVIATIONS ABBREVIATIONS ASEAN Association of Southeast Asian Nations Bac Baccalauréat Brexit Withdrawal of the United Kingdom from the European Union CBOE Chicago Board Options Exchange’s CEU Cambodia Economic Update CR Cambodian riel DOE District Office of Education DSA debt sustainability analysis EAP debt sustainability analysis EC European Commission EMDEs emerging markets and developing economies EU European Union FCD foreign currency deposit GDP gross domestic product HRMIS Human Resource Management Information System ILO International Labor Organization IMF International Monetary Fund KPIs Key Performance Indicators LPCO Liquidity-Providing Collateralized Operation MoEYS Ministry of Education, Youth, and Sports NBPTS National Board for Professional Teaching Standards NCD negotiable certificate of deposit NGS New Generation School NPL nonperforming loan OECD Organisation for Economic Co-operation and Development PMI Purchasing Managers’ Index PISA Program for International Student Assessment POE Provincial Office of Education PTTC Provincial Teacher Training Center q/q quarter-on-quarter RTTC Regional Teacher Training Center SAAR seasonally adjusted annual rate SBM School-Based Management SMC School Management Committee SME small and medium-sized enterprise SSC School Support Committee UK United Kingdom U.S. United States US$ United States dollar VAT value-added tax VIX Volatility Index WBG World Bank Group WDI World Development Indicators WTTC World Travel and Tourism Council y/y or yoy year-on-year CAMBODIA ECONOMIC UPDATE | MAY 2020 2 EXECUTIVE SUMMARY EXECUTIVE SUMMARY The global epidemiological and economic crisis unleashed contagion, severity, and duration of the outbreak, by COVID-19 poses the greatest threat to Cambodia’s the response of societies, and the magnitude development in its 30 years of modern history. The three and effectiveness of policy actions. The direct most affected sectors—tourism, manufacturing exports, costs of preventive measures to contain a local and construction—contributed more than 70 percent of outbreak currently appear manageable. However, growth and 39.4 percent of total paid employment in the outbreak caused sharp decelerations in most 2019. Therefore, in the current year, Cambodia’s economy of Cambodia’s main engines of growth in the first is likely to register its slowest growth since 1994, contracting quarter of 2020, including weakened tourism (and between -1 percent (baseline) and -2.9 percent (downside). hospitality) and construction activity and, more Poverty could increase between 3 and 11 percentage points recently, the export sector. from a 50 percent income loss that lasts for six months Transmission channels for households engaged in tourism, wholesale and retail trade, garment, construction, or manufacturing. The The spillovers of COVID-19 are being felt fiscal deficit could reach its highest level in 22 years, and largely through three key channels: tourism, public debt is expected rise to 35 percent of gross domestic exports, and foreign direct investment (FDI) product (GDP) by 2022. The authorities have introduced (table ES.1). Cambodia has been heavily reliant emergency measures to contain the outbreak and provide on tourists from the East Asia and Pacific region, fiscal assistance to affected households, workers, and especially Chinese tourists, who account for 35 enterprises. To facilitate a robust recovery, the government percent of total international arrivals. International will need to continue to ensure macroeconomic and financial arrivals rapidly declined after the COVID-19 sector stability and accelerate trade and investment reforms outbreak in China. As the virus spread from China as well as encourage faster adoption of digital technologies. to the rest of the world, tourism activity has come to a standstill. An unprecedented shock Cambodia has strong economic Table ES.1.  In Cambodia, the first case of coronavirus was linkages with countries affected confirmed on January 27, 2020, and as of May by COVID-19 12, 2020, there are 122 cases.1 The Cambodian Top 5 markets for Cambodia’s merchandise exports, authorities have taken swift action to detect and tourist arrivals and FDI origins (2019, percent) prevent local outbreaks by imposing a travel ban on visitors from severely infected countries, closing Exports Tourism FDI inflows schools, urging citizens to avoid mass gatherings, U.S. 26.8 China 32.6 China 40.0 and postponing mass celebrations of the Khmer E.U. 25.0 Vietnam 12.9 Hong Kong, 10.9 New Year ceremony in mid-April, including an PRC SAR imposition of a lockdown during the three-day Japan 7.7 Lao PDR 6.9 Korea, Rep. 7.8 Khmer New Year celebration period (see box 1 for Canada 6.2 Thailand 6.2 Singapore 7.1 more details). In April 2020, a “State of Emergency” UK 6.1 Korea, Rep. 4.9 Japan 6.2 law was urgently adopted (and ready to be declared, ROW 38.2 ROW 36.5 ROW 28.0 if there are public health emergencies). Sources: U.S. Comtrade; Cambodian authorities; and World Bank staff estimates. While Cambodia has so far avoided a health Note: Total merchandise exports = US$25,199.39 million crisis, it has not been immune from the (2019); foreign arrivals = 6.61 million (2019); and FDI inflows economic crisis sweeping the global economy. = US$2,845 million (2019e). ROW = rest of the world. The growth impact of COVID-19 hinges on the 1 World Health Organization; https://www.who.int/cambodia/news/detail/12-05-2020-who-works-closely-with-the-royal-government-of-cambodia-in- the-fight-against-covid-19. 3 CAMBODIA ECONOMIC UPDATE | MAY 2020 EXECUTIVE SUMMARY The lack of external demand has been Impacts of the COVID-19 Table ES.2.  amplified by the fact that Cambodia’s exports outbreak on Cambodia’s main are significantly concentrated by both products growth drivers and employment and destinations. The key exported products and footwear Construction include garments, footwear, travel goods, and rice. Garment Tourism The combined U.S. and EU markets comprise Total Drivers of growth about 52 percent of Cambodia’s total merchandise exports. In addition, exports rely on imports of intermediate goods (raw materials for Cambodia’s Contribution to GDP 18.7 17.0 35.7 71.4 garment, footwear and travel goods industries) growth (2019, percent) which earlier experienced supply chain disruptions. Direct employment (’000) 620 941 200 1,761 The collapse of global trade has significant negative Percent of paid 13.9 21.0 4.5 39.4 direct and indirect impacts on Cambodia. employment1 Percent of non-farm Finally, FDI inflows, which lately have gone 11.2 17.0 3.6 31.9 employment largely to the construction sector, have Percent of total originated from a small number of regional 7.1 10.7 2.3 20.1 employment countries, especially China. The greater China Source: Cambodian authorities and World Bank staff region, which includes Hong Kong SAR, China, estimates. and Taiwan, China, accounts for more than 50 Note: 1. Wage employment. percent of total FDI inflows in recent years. It is ii. The trade sector estimated that about half of FDI inflows have gone to the construction and real estate sector. The COVID-19 pandemic has also triggered After the COVID-19 outbreak in China, the value an unprecedented export demand shock, after of approved FDI projects significantly contracted. causing supply chain disruptions. As a result, a large part of garment, footwear, and travel goods i. Tourism—the hardest-hit sector orders from the two main destinations, namely The demand for tourism and hospitality the United States and EU, have either been frozen services has largely collapsed in recent months. or cancelled. This occurred after Cambodia’s The global response to contain the COVID-19 manufacturing export industries experienced supply outbreak has resulted in prolonged international chain disruptions causing some garment factory travel restrictions and internal lockdowns. During closures in early March 2020. As shown in table the first two months of 2020, tourist arrivals ES.2, in 2019, the garment and footwear industry contracted by 25.1 percent (year-on-year [y/y])—the contributed to almost one-fifth of GDP growth. In first contraction since the 2008–09 global financial addition, the EU has announced the withdrawal of crisis. Siem Reap, Cambodia’s most popular tourist tariff preferences and their replacement with the destination, experienced a 45.6 percent decline in EU’s standard tariffs (most-favored nation MFN), tourist arrivals during the first quarter and a 99.6 which will affect selected garment and footwear percent reduction (y/y) in April 2020.2 products, and all travel goods and sugar, amounting to around €1 billion or one-fifth of Cambodia’s Tourism (including hospitality) is the second- yearly exports to the EU.4 largest growth driver, estimated to have contributed about 18.7 percent of real GDP The latest updates from the industry show growth in 2019 (table ES.2).3 The tourism sector is that most factories will have only limited an important foreign exchange earner, accounting orders after the first half of 2020. This is for more than three-quarters of Cambodia’s because some orders have been either frozen services exports, and about one-fifth of its total or cancelled. Consequently, about 130 garment goods and services exports. and footwear factories (12 percent of total) have 2 News Release on international tourist and Angkor revenue statistics, April 1, 2020, Angkor Enterprise. 3 According to the World Travel and Tourism Council (WTTC), in 2019 travel and tourism contributed an estimated 33 percent of Cambodia’s GDP, while official national accounts data indicate that the share of the entire services sector in GDP was only 38.8 percent. According to the WTTC, travel and tourism account for 2.9 million jobs. 4 For more details, please see https://trade.ec.europa.eu/doclib/press/index.cfm?id=2113. CAMBODIA ECONOMIC UPDATE | MAY 2020 4 EXECUTIVE SUMMARY suspended operations either partially or fully chain disruptions, and nationwide lockdowns, since mid-April 2020, laying off close to 100,000 is hitting most of Cambodia’s main drivers of workers.5 Official data show that as of February growth hard. While real GDP growth was strong 2020, the export garment, footwear, and travel at 7.1 percent in 2019, it is projected to register goods industry consisted of 1,087 factories and a negative growth rate, ranging between -1.0 and employed 941,000 workers, representing 21.0 -2.9 percent in 2020 (figure ES.1). percent, 17.0 percent, and 10.7 percent of paid, At least 1.76 million jobs are currently at risk non-farm, and total employment, respectively.6 due to the COVID-19 outbreak. The collapse The formal garment sector is the main source of the growth drivers has not only hurt economic of government revenue, especially direct growth but has also caused unemployment to revenue. The sector is the largest formal and paid potentially sore to nearly 20 percent. It is estimated employment industry in the economy, although it that the three main growth drivers—tourism, is ranked third in terms of its contribution to real manufacturing exports, and construction—that economic growth, providing about 17.0 percent account for 71 percent of growth and 20 percent of real GDP growth in 2019. of total employment have been most directly affected by COVID-19. iii. Construction and FDI inflows In the absence of significant mitigation The construction (and real estate) sector has measures, the COVID-19 pandemic could been the largest engine of growth in recent lead to a sharp increase in poverty. Poverty years. As illustrated in table ES.2, in 2019, simulations show that poverty would increase construction and real estate contributed more between 1 and 5 percentage points from a 50 than a third of GDP growth. Along with the percent income loss that lasts for three months export sector, it has been one of the main sources for households engaged in tourism, wholesale of government revenues from indirect and and retail trade, garment, construction, or international trade taxes. Recently, the construction manufacturing, or between 3 and 11 percentage industry has been increasingly financed by FDI points from an income loss that lasts for six inflows. It is estimated that Cambodia received months.7 Returning migrants from Thailand,8 and 40 percent of total FDI inflows from mainland their households that relied on their remittances, China, with the majority of the inflows channeled are also likely to face significant income losses and to the construction sector. an elevated risk of falling into poverty. During the first two months of 2020, both Possible spillover to the financial market construction activity and (approved) FDI inflows significantly weakened. Imports of The spillover effects from a slowdown in the steel, which is largely used for construction, dipped real sector to the banking and financial sector by 47.4 percent (y/y) in the first two months of could be sizable. The tapering of capital inflows 2020. Likewise, approved FDI projects for the is triggering the easing of real estate market construction sector contracted by 40.2 percent prices, likely ending the construction boom. (y/y) during the same period. This will greatly With the current large outstanding credit to the diminish economic growth, although its effect construction, real estate, and mortgage sector (see on employment is relatively muted, given that the the discussion of the monetary sector below for latest construction boom is in large part of luxury more details), nonperforming loans are expected high-rise buildings and is relatively capital intensive. to rise. The share of outstanding bank credit (excluding microfinance and shadow banking Economic and social impacts credits) financing to the combined construction, Cambodia is expected to experience its lowest real estate, and mortgage businesses peaked at growth rate since 1994. The COVID-19 shock, 31.1 percent or US$7.7 billion (28.6 percent of propagated through falling global demand, supply GDP) by end-2019. A potential effect on the 5 Official press conference on April 27, 2020, on the quarantine of returning garment workers by the Ministry of Labor and Vocational Training. 6 February 2020 report, Ministry of Industry, Science, Technology and Innovation. 7 April 2020 East Asia and Pacific Economic Update, the World Bank. 8 It is estimated that as of April 2020, around 80,000 migrant workers have returned to Cambodia since the COVID-19 outbreak. 5 CAMBODIA ECONOMIC UPDATE | MAY 2020 EXECUTIVE SUMMARY microfinance sector is through the losses of country’s key foreign exchange earners, namely household incomes with rising laid-off workers tourism and exports, are being hit hard by the from the tourism, garment, and construction outbreak, while FDI inflows are also slowing. In sectors. Importantly, a real estate market correction 2020, the country’s foreign exchange reserves are has started, following a prolonged construction expected to decline to US$16.8 billion (6.8 months and property boom, increased credit provided to of prospective imports), down from US$18.7 the construction/real estate/mortgage sector, and billion (7.6 months of prospective imports). high outstanding credit. Outlook and risks Implementing monetary policy easing, the The coronavirus outbreak will severely impact central bank reduced the reserve requirement the economy. The outbreak has caused sharp ratio to 7 percent for both local and foreign decelerations in most economic activities, and currencies for six months starting in April 2020 even collapses of some sectors underpinning from 8 percent for riel and 12.5 percent for foreign Cambodia’s economic growth. And the actual shape currencies. The central bank is advising commercial and pace of recovery remains highly uncertain and banks and micro-finance institutions to review largely dependent on the course of the virus. In loan repayments by households impacted by the the base case scenario, which assumes a recovery COVID-19 outbreak. Delayed repayment and in global growth with a gradual pickup in global loan rescheduling may be considered. Globally, demand when lockdowns are steadily eased in the the outbreak has led to increased financial market second half of 2020, while domestic economic volatility, including in equity markets across Asia. conditions improve without significant long-term Currency markets and commodity prices are also adverse impact of the lockdowns on the corporate, being affected, with the recent collapse of oil banking sector or balance of payments, real growth prices. is projected to contract by 1.0 percent in 2020. The Implications for domestic revenue and economy is expected to recover sharply to register foreign exchange reserves 6.0 percent growth in 2021, helped by a rebound in global demand. The downside scenario assumes The COVID-19 outbreak is hitting Cambodia’s global lockdowns and restrictions continue until the revenue base. As mentioned above, the export third quarter of 2020 with moderate to significant and construction sectors are the main sources of adverse effects resulting in liquidity problem direct revenues and indirect (and international becoming solvency problem affecting corporates trade) revenues, respectively. The least affected and ultimately the balance of payments. Real GDP agriculture sector is tax-exempt. It is highly likely under the downside scenario is projected to contract that revenue collection in 2020 will be significantly by 2.9 percent in 2020 and sluggishly recover to below the budget target. The overall fiscal deficit reach 3.9 percent in 2021. However, the downside (including grants) is therefore projected to widen to scenario does not capture potential financial risks 9.0 percent of GDP in 2020, down from a surplus possibly caused by macro-financial linkages. of 0.5 percent in 2019 (see Annex 2 for Cambodia’s key macroeconomic indicators). The shortfall The risks stemming from an overleveraged in domestic revenue collection will require the financial sector are rising. Several financial sector authorities to dip into government savings, and the vulnerabilities could exacerbate the COVID-19 domestic financing need is projected to amount to shock. These vulnerabilities include high credit 5.3 percent of GDP. In 2019, government savings concentration, related party lending risks, lack of stood at 20.2 percent of GDP (or 22.2 trillion riels) consolidated cross-border supervision and gaps after several years of accumulation. Given the in implementation of risk-based supervision.9 authorities’ ample liquidity, recourse to domestic Liquidity risks also remain elevated, as financial (central bank) financing to fill the widening overall institutions rely on funding from abroad, including fiscal deficit is not expected. from parent banks (to banks). The concentration of FDI inflows in a few sectors (namely banking, Cambodia’s international reserves position construction and real estate) combined with bank is also projected to deteriorate, given that the 9 Staff report for the 2019 Article IV consultation, IMF. See https://www.imf.org/en/Publications/CR/Issues/2019/12/23/Cambodia-2019-Article- IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-48912 CAMBODIA ECONOMIC UPDATE | MAY 2020 6 EXECUTIVE SUMMARY lending primarily in construction and real estate implications on how regional and global trade and creates an additional source of risk. investment will be conducted going forward, with expected major shifts in trade and migrant policies, Policy options and flow of goods and services. There is a need Policy options in response to the COVID-19 for the authorities to think about a future where outbreak must aim to (i) provide immediate strengthening domestic demand, protecting the and urgent economic relief and public health local consumer purchasing power amid external protection, (ii) underpin an economic recovery shocks of public health and/or natural disasters, and in the short term, and (iii) foster macro-fiscal increasing production for domestic consumption, and social resilience in the medium term. are the way to move forward. In this regard, The most urgent step is to provide support to intervention measures recently introduced by the households to alleviate poverty. This includes authorities include tax relief, and improved access leveraging existing programs and relief as well as by small businesses and household enterprises to targeting mechanisms to support the poor and cheaper credit using co-financing facilities between vulnerable through social assistance to maintain the newly established Small and Medium Enterprise their living conditions. This intervention policy is Bank of Cambodia (SME Bank) and commercial being implemented together with the wage subsidy lenders (banks and microfinances). Similarly, measure (see box 1). To scale up Cambodia’s additional capital injection of US$ 50 million for existing social assistance and social insurance the Rural Development and Agriculture Bank has schemes, after providing immediate relief been provided to support agroprocessing firms programs, it is crucial to strengthen the existing and emerging agribusinesses. However, the success mechanism to identify the poor through its IDPoor of the measures hinges on targeting appropriate program. It is critical to continue the current core small, medium, and large firms and enterprises that public health response including case detection, are efficient and viable but lack cheaper financing isolation, contact tracing quarantine. In addition, sources to create jobs, to run profitably, and to hand hygiene, cough etiquette, and physical export. This should also include family and small distancing should continue as important preventive firms operating in retail and low-end tourism, where measures. The authorities have responded well to large numbers of informal or semiformal firms the first wave of the outbreak. However, as the might either be impacted by the pandemic or not. pandemic is still far from over, Cambodia needs to The final step is to ensure economic and be ready to respond to a possible future outbreak. social resiliency in the medium term after the Effective business continuity plans and use outbreak has been brought under control. of digital technologies are needed to ensure Refocusing and reenergizing efforts and sources uninterrupted provision of relief programs and that might have been interrupted or diverted to service. The plans set out contingency measures cope with the COVID-19 outbreak to moving to minimize disruptions to the organization’s forward with key structural and sectoral reforms is operations in case of crisis by leveraging emerging crucial. In this connection, attention must be paid digital and information technologies. Depending and efforts must be made to improve macro-fiscal on the magnitude and severity of impacts of the resilience, address the vulnerabilities in the financial COVID-19 outbreak, phased implementation of sector, strengthen external competitiveness and the plans, which integrates all critical government diversification to mitigate the impact of potential (administration, finances, and health) functions external shocks, while ensuring readily available should maintain minimum operations, enabling social protection and relief programs that can the uninterrupted provision of emergency food be quickly activated and/or scaled up during an assistance, economic relief, and public health emergency. To achieve economic resiliency, it emergency assistance. is necessary to further promote ease of doing business, the investment climate, and a reduction The effectiveness of government intervention of energy and logistics costs to reintegrate with will be essential to facilitate economic recovery. regional and global value chains after a period of The COVID-19 pandemic will likely have major interruption caused by the outbreak. 7 CAMBODIA ECONOMIC UPDATE | MAY 2020 FIGURE ES.1. CAMBODIA’S RECENT DEVELOPMENTS AT A GLANCE Real growth, which had been strong until last year, …as key exports, which started to ease last year, has been hit hard by the global COVID-19 outbreak… are being affected by external demand shocks… Real growth (percent) Garment and footwear exports (y/y, percent change) 16 Baseline 30 14 Downside 25 Proj� 12 20 10 15 8 10 6 5 4 0 2 -5 0 -10 -2 -15 -4 7 7 7 8 18 19 9 9 -1 -1 -1 r-1 l-1 -1 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020f p- b- ec Jan Jan ov Ju Ap Se Fe D N …and the tourism sector has collapsed due to …construction activity eased, as reflected in the international travel bans and internal lockdowns… contraction of steel imports International arrivals (y/y percent change) Construction materials and steel imports (y/y, percent change) 40 Other materials Steel imports 20 100 Cement imports Cooling equipment 80 0 60 -20 GFC(2008/09) 40 -40 20 Total Siem Reap -60 0 -80 -20 Covid-19 outbreak (2020) -40 -100 May-18 May-10 May-12 May-14 May-16 Sep-17 Sep-19 Sep-09 Sep-11 Sep-13 Sep-15 Jan-15 Jan-17 Jan-19 Jan-09 Jan-11 Jan-13 -60 Dec-17 Dec-18 Dec-19 Jan-20 With the tapering of capital inflows, broad money …and growth of bank credit to the private sector growth slowed… decelerated Broad money (y/y percent change) Credit to the private sector (y/y percent change) 35 30 25 30 20 25 15 20 10 15 5 0 10 Jan-17 Jun-17 Nov-17 Apr-18 Feb-19 Jul-19 Dec-19 Sep-18 Dec-19 Dec-16 Dec-17 Dec-18 Dec-14 Dec-15 Dec-11 Dec-12 Dec-13 Dec-10 Sources: Cambodian authorities; World Bank staff estimates and projections. Note: GFC = global financial crisis. Image credit: ©Morgan Havet, Hanuman Films Section I Recent Economic Developments and Outlook Recent Economic Developments and Outlook Recent Economic Developments and Outlook Recent developments The global COVID-19 outbreak has dramatically disrupted economic activity Economic activity quickly diminished due to in the region and the world. In 2019, overall the global COVID-19 outbreak economic activity was cushioned by resilient Growth momentum quickly disappeared private consumption and accommodative fiscal in early 2020 due to the global COVID-19 and monetary policies. More importantly, the outbreak. Although growth was strong, reaching world welcomed phase one of the trade deal 7.1 percent in 2019 (figure 1), the outbreak caused signed between the United States and China sharp decelerations in most of Cambodia’s main in January 2020 after more than two years of engines of growth in the first quarter of 2020, escalating tariffs. However, global and regional including weakened tourism (and hospitality) growth momentum ceased abruptly as the and construction activity and, more recently, the COVID-19 pandemic intensified (see boxes 2 and export sector. The tourism sector is the first and 3 for recent global and regional developments and hardest-hit growth driver since the COVID-19 outlook). According to the World Bank’s April outbreak started in China. Then, external demand 2020 East Asia and Pacific (EAP) Economic shocks caused by the global COVID-19 outbreak Update, global GDP was expected to decline by triggered the postponement and cancellation of 2.1 percent, while developing countries’ GDP garment and footwear orders. As a result, garment was expected to decline by 2.5 percent and high- and footwear factories have started to partially income countries by 1.9 percent (figure 2). The or totally suspend their operations. Recently, biggest GDP losses under the global pandemic the construction industry has been increasingly scenario were expected in EAP countries due to financed by foreign direct investment (FDI) their relatively deep integration through trade and inflows. It is estimated that Cambodia received 40 direct impact on tourism.10 Since then, global and percent of its total FDI inflows and a majority regional growth has been downgraded further. In of the inflows channeled to the construction China, growth projection has been revised down sector from mainland China. During the first few to 1.0 percent in 2020, compared to the pre- months of 2020, both construction activity and COVID projection of 5.9 percent. (approved) FDI inflows weakened significantly. Figure 1: Sector contribution to real growth Figure 2: GDP and export implications of the global pandemic scenario (percent) (percent deviation from the benchmark) Agriculture Industry GDP Exports Services Taxes less subsidies 0 10 -1 7�5 8 7�1 7�3 7�4 7�1 7�0 6�9 7�0 -2 6�7 6�1 7�1 Proj� 6 -3 4 -4 Korea, Rep� Rest of high-income East Asia Rest of developing East Asia United States European Union + UK Europe & Central Asia Other high-income Developing countries China Japan Latin America & Caribean Middle East & North Africa Sub-Saharan Africa South Asia World total Countries 2 0 0�1 -2 -1�0 -4 2018 2019e 2015 2016 2017 2013 2014 2011 2012 2009 2010 2008 2020p Source: Cambodian authorities and World Bank staff Source: World Bank 2020a. estimates. Note: e = estimate; p/proj. = projection. 10 World Bank 2020. 11 CAMBODIA ECONOMIC UPDATE | MAY 2020 Recent Economic Developments and Outlook After the start of the COVID-19 epidemic, The tourism and hospitality industry has the first case of coronavirus in Cambodia faced both a structural slowdown and severe was confirmed on January 27, 2020. As of May impacts of the COVID-19 outbreak 12, 2020, there were 122 cases. The Cambodian Tourism is the hardest-hit sector. The demand authorities have taken swift action to detect and for tourism and hospitality services has largely prevent local outbreaks by imposing travel bans on collapsed in recent months. The global response visitors from severely infected countries, closing to contain the COVID-19 outbreak has resulted schools, urging citizens to avoid mass gatherings, in prolonged international travel restrictions and postponing mass celebrations of the Khmer and internal lockdowns. During the first two New Year ceremony in mid-April, including an months of 2020, tourist arrivals contracted by imposition of a lockdown during the three-day 25.1 percent (y/y)—the first contraction since Khmer New Year celebration period. A “State of the 2008–09 global financial crisis (figure 3). Emergency” law was urgently adopted. Siem Reap, Cambodia’s most popular tourist While Cambodia has avoided a health crisis destination, experienced a 45.6 percent decline in so far, it has not been immune from the tourist arrivals during the first quarter and a 99.6 economic crisis sweeping the global economy percent (y/y) contraction in April 2020.11 The growth impact of COVID-19 hinges Tourism (including hospitality) is the on the contagion, severity, and duration of second-largest growth driver, estimated to the outbreak, the response of societies, and have contributed about 18.7 percent of real the magnitude and effectiveness of policy GDP growth in 2019.12 The tourism sector is an actions. The direct costs of preventive measures important foreign exchange earner, accounting for to contain a local outbreak currently appear more than three-quarters of Cambodia’s services manageable. However, the outbreak has caused a exports, and about one-fifth of Cambodia’s total sharp deceleration in most of Cambodia’s main goods and services exports. In 2019, Cambodia engines of growth in the first quarter of 2020, welcomed 6.61 million visitors, a 6.6 percent including weakened tourism (and hospitality) increase over 2018. and construction activity and, more recently, the The structural slowdown in the tourism export sector. sector has occurred over the past few years as Figure 3: Total international and Siem Reap arrivals Figure 4: International arrivals (y/y, percent change) (y/y, percent change) 40 Chinese tourists (percent of total, RHS) Total (excl� China, y/y percent change) 30 40 20 Total (y/y percent change) 25 35 0 20 30 Total Siem Reap -20 15 25 10 20 -40 Global Financial Crisis (2008/09) 5 15 -60 0 10 -80 Covid-19 (2020) -5 5 -10 0 -100 Jan-09 Apr-11 Jan-12 Oct-12 Apr-14 Jan-15 Oct-15 Apr-17 Jan-18 Oct-18 Oct-09 Jul-10 Jul-13 Jul-16 Jul-19 Source: Cambodian authorities. Source: Cambodian authorities. Note: RHS = right-hand scale. 11 News Release on international tourist and Angkor revenue statistics, April 1, 2020, Angkor Enterprise. 12 According to the World Travel and Tourism Council (WTTC), in 2019 travel and tourism contributed an estimated 33 percent of Cambodia’s GDP, while official national accounts data indicate that the share of the entire services sector in GDP was only 38.8 percent. According to the WTTC, travel and tourism account for 2.9 million jobs. CAMBODIA ECONOMIC UPDATE | MAY 2020 12 Recent Economic Developments and Outlook Box 1. Cambodian public health measures and economic policy in response to the COVID-19 outbreak Confirmed infected and recovered cases: The first case was confirmed in Sihanoukville in a 60-year-old Chinese man who arrived from Wuhan, Hubei, with his family on January 27, 2020. Between January 27 and April 17, 2020, the number of infections increased to 122, of which, 87.7 percent, recovered (figures B1.1 and B1.2). By May 16, 2020, all COVID-19 patient recovered. Most of the infected cases are imported. A geographic breakdown reveals that the top three locations where COVID-19 was found were Sihanoukville, Phnom Penh, and Kampong Cham, which had 32.5 percent, 22.8 percent, and 13.8 percent of the cases, respectively (figure B1.3). Figure: B1.1: Covid-19 cases Figure B1.2: Covid-19 sources Figure B1.3: COVID-19 locations 140 80�3% 68�9% 59�0% 120 Other 41�0% 31�1% provinces 100 19�7% 18�7% Sihanoukville 80 Siem Reap 32�5% 5�7% 60 Battambang Male Local Import Female Foreigner Cambodian 6�5% 40 Kampong 20 Cham Phnom Penh 13�8% 22�8% 0 Import compared Cambodian Gender 27-Jan 16-Mar 23-Mar 31-Mar 11-Apr to Local compared to Foreigner Source: World Bank staff using Ministry of Health data. Containing the outbreak: Three battles are being fought simultaneously: (i) measures against imported cases, covering over 80 percent of the cases by banning all entries from France, Germany, Italy, Spain, and the United States; (ii) raising awareness on self-protection, social distancing, early school break, a ban on gatherings, and especially a cancellation of Khmer New Year holidays together with temporary interprovincial travel restrictions, among others; and (iii) striving to offer effective treatment, which, in turn, resulted the in recovery of all infected patients. Preparing for a bigger battle, 3,000 rooms have been made available throughout the country with 422 additional staff mobilized. Social and fiscal policy responses: Key policy measures which have been introduced include: (i) scaling up of existing social protection schemes through cash transfers to poor and vulnerable households; (ii) tax relief for the tourism and manufacturing export (garment/footwear/travel goods) sectors; (iii) retraining and upskilling programs for laid-off workers in the sectors; (iv) US$ 70 wage subsidy (US$40 paid by the Government and US$30 paid by firm/factory) for suspended workers; (v) an exemption of the ownership transfer tax for property valued at US$70,000 or less; (vi) additional capital injection of US$ 50 million for the Rural Development and Agriculture Bank to support agroprocessing firms; (vii), establishment of a new SME Bank with an initial capitalization of US$100 million; and (viii) improving the ease of doing business, trade facilitation, including customs post audit clearance. Monetary policy responses: The central bank has introduced monetary policy easing. The reserve requirement rate was reduced to 7 percent for both local currency and foreign currency, down from 8 percent for local currency and 12.5 percent for foreign currency and domestic currency, respectively, from April 2020 onward. The benchmark rate of LPCO operations for all maturities was also reduced by 0.5 percent. The central bank also decided to postpone full implementation of the Capital Conservative Buffer and to maintain the 50 percent current requirement, cut the interest rate on negotiable certificates of deposit for both riels and U.S. dollars at an appropriate level, and reduce the minimum requirements of the Liquidity Coverage Ratio to an appropriate rate. Commercial banks (and microfinance institutions) have been advised to reschedule loan repayments by hard-hit borrowers including restaurants, hotels, guesthouses, beverage shops, and others. In order to implement the response measures mentioned above, the authorities have established the following interministerial working groups/task forces: (i) a task force to manage supplies and prices of strategic commodities; (ii) a budget policy on financing and social assistance; and (iii) a multidisciplinary working group to study and plan monetary and banking measures. Note: This box was prepared by Runsinarith Phim and Sodeth Ly. 13 CAMBODIA ECONOMIC UPDATE | MAY 2020 Recent Economic Developments and Outlook indicated by its low repeat visit rate of less of the complex, and restoration of physical than 20 percent. However, the sector initially infrastructure including beautification projects received a substantial boost when the authorities’ to make its surrounding environment greener “China ready” initiative introduced in 2016 paid and better organized.14 The authorities are also off. This has resulted in a significant rise in the studying the tourism master plan for the entire share of Chinese visitors, which peaked at 35.7 Siem Reap province and have identified new percent in 2019, more than offsetting the overall potential tourism products, particularly in Kulen decline of arrivals from the rest of the world. Mountain, the Tonle Sap area, and the areas Excluding Chinese tourists, international arrivals located within the temples of Angkor. decelerated sharply since 2014 and contracted in The COVID-19 pandemic has triggered an 2018 (figure 4). In 2019, arrivals from Cambodia’s unprecedented export demand shock immediate neighbors, Vietnam, Thailand, and Lao PDR, continued to be the next three-largest An unprecedented export demand shock destinations, capturing 13.7 percent, 7.1 percent, has resulted in the cancellation of a large and 5.5 percent of total international arrivals, part of garment, footwear, and travel goods respectively. Arrivals from the East Asia and orders from the two main destinations, the Pacific region as a whole account for about 80 United States and EU. In addition, the EU has percent of total arrivals. announced the withdrawal of tariff preferences and their replacement with the EU’s standard In response, the authorities have introduced tariffs (most-favored nation), which will affect measures to support the tourism industry selected garment and footwear products, as well with tax relief (and social security contribution as all travel goods and sugar, amounting to around exemptions) to ease the cash flow crunch, while €1 billion, or one-fifth of Cambodia’s yearly the central bank advised commercial banks (and exports to the EU.15 microfinance institutions) to reschedule loan repayments by hard-hit borrowers including The latest updates from the industry show restaurants, hotels, guesthouses, beverage shops, that most factories will have only limited and others.13 In addition, efforts have been orders after the first half of 2020. This is made to restore the attractiveness of the temple because some orders have been either frozen or complex, with conservation and rehabilitation cancelled. Consequently, about 130 garment and Figure 5: Destination of garment, footwear, and Figure 6: Cambodia’s main exports by major travel good exports destination (y/y percent change) (percent share) US EU (incl� UK) Japan RoW 40 Dec-17 Dec-18 Dec-19 70 35 31�8 60 30�1 50 30 40 25 20�8 30 20 20 10 15 8�3 9�0 0 10 -10 5 -20 0 Jul-19 Jul-17 Jul-18 Jan-18 Jan-19 Jan-17 Oct-19 Oct-17 Oct-18 Apr-18 Apr-19 Apr-17 US EU UK Japan RoW Source: Cambodian authorities. Source: Cambodian authorities. Note: RoW = rest of the world. Note: RoW = rest of the world. 13 National Bank of Cambodia circular dated March 27, 2020, on credit restructuring during the COVID-19 outbreak. 14 See Apsara authorities’ website; http://apsaraauthority.gov.kh/?page=front&lg=en. 15 For more details, please see https://trade.ec.europa.eu/doclib/press/index.cfm?id=2113. CAMBODIA ECONOMIC UPDATE | MAY 2020 14 Recent Economic Developments and Outlook footwear factories (12 percent of the total) have and travel goods exports to the EU (including the partially or fully suspended operations since mid- UK) market by 0.5 percent (figure 5), falling for April 2020, laying off nearly 100,000 workers.16 the first time since the 2008–09 global financial The official data showed that as of February crisis. Rising exports to the U.S. market helped 2020, the export garment, footwear, and travel partly offset the contraction of exports to the EU goods industry consisted of 1,087 factories and market. employed 941,000 workers, representing 21.0 Exports of travel goods (and other textile percent, 17.0 percent, and 10.7 percent of paid, products) outpaced those of footwear in 2019 non-farm, and total employment, respectively.17 The formal manufacturing export sector is the Cambodia’s total exports of travel goods (and main source of government revenues, especially other textile products) rapidly expanded, direct revenues. The sector is the largest formal reaching US$1.29 billion (96.3 percent growth) in and paid employment industry in the economy, 2019, greatly outpacing the acceleration of total although it is ranked third in terms of its footwear exports, which reached US$1.26 billion contribution to real economic growth, providing (21.6 percent growth). The rapid expansion of about 17.0 percent of real GDP growth in 2019. travel goods exports is largely a result of the duty- free and quota-free access to the U.S. market Garment, footwear, and travel goods export granted in 2016. growth decelerated quickly in the first quarter of 2020 The United States became the largest market for Cambodia’s combined garment, travel Due to the global COVID-19 outbreak, goods, and footwear exports garment, footwear, and travel goods export grew only 7.5 percent in the first quarter of The United States is now the largest market 2020, down from 17.7 percent in 2019. Before for Cambodia’s garment, travel goods, and the COVID-19 outbreak, growth of combined footwear exports. In 2019, the share of the U.S. garment, footwear, and travel goods exports market rose to 31.8 percent (figure 6). The EU marginally decelerated to 13.6 percent in 2019, market (excluding the UK) is second, accounting down from 17.7 percent in 2018. This was driven for 30.1 percent of the total. As depicted in figure by a contraction of combined garment, footwear, 5, the exports of garment, travel goods, and Figure 7: Cambodia’s main export products to Figure 8: Cambodia’s main export products to the U.S. market the EU market (percent share) (percent share) Garment Footwear Travel goods (1) Bicycles Garment Footwear Travel goods (1) Bicycles 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Source: Cambodian authorities. Source: Cambodian authorities. Note: (1) Travel goods and other textile products. Note: (1) Travel goods and other textile products. 16 April 27, 2020, Ministry of Labor and Vocational Training press conference on the quarantine of returning garment workers. 17 February 2020 report, Ministry of Industry, Science, Technology and Innovation. 15 CAMBODIA ECONOMIC UPDATE | MAY 2020 Recent Economic Developments and Outlook footwear products to the U.S. market accelerated footwear exports to the EU market remained to 38.1 percent y/y in 2019, up from 29.1 percent solid, accounting for US$478.8 million at a 19.7 in 2018. Disaggregating the export data to the percent growth rate. As a result, the share of U.S. market shows that garment exports remained garment exports shrank to 78 percent in January strong last year, reaching US$2.3 billion, or a 16.8 2020, down from 84.4 percent in January 2017 percent increase. Boosted by the duty-free and (figure 8). Cambodia’s travel goods exports to the quota-free access, exports of travel goods (and EU market remained relatively small, at US$155.5 other textile products) skyrocketed, becoming million (only 18 percent of those to the U.S. the second-largest export items after garments, market). The combined U.S. and EU markets amounting US$860 million in 2019, or a 143.5 represent almost the entire travel goods exports percent increase. The exports of footwear from Cambodia, while its garment and footwear products ranked third, amounting to US$300 exports to the EU market were 15 percent and million, increasing by 60.1 percent in 2019. In the 60 percent larger than those of the U.S. market, U.S. market, the share of garment exports shrank respectively. to 60 percent in January 2020, down from 88.6 The Japanese market appears promising for percent in January 2017, caused largely by the Cambodia’s exports of electronic and vehicle accelerating growth of travel goods exports (figure parts and accessories 7). In this regard, the share of travel goods (and other textile product exports) rose to 29 percent, The next two largest markets for Cambodian up from 3.6 percent during the same period. exports were Japan (US$1.05 billion) and the United Kingdom (US$945 million) in 2019. Garment exports to the EU market While the two markets captured similar values of contracted for the first time since the 2008–09 Cambodia’s garment exports of about US$800 global financial crisis million, the Japanese market seems very promising Disaggregating Cambodia’s exports to for Cambodia’s exports of electronic and vehicle the EU (excluding the UK) market shows parts and accessories (figure 9). Cambodia’s exports that in 2019, garment exports contracted of electronic and vehicle parts and accessories to by 0.7 percent, reaching US$2.61 billion in Japan rose to US$77.8 million in 2019, up from 2019, down from US$2.63 billion in 2018. The US$39.4 million in 2018. This should be further contraction happened for the first time since promoted in order diversify beyond garments. the 2008–09 global financial crisis. In contrast, Figure 9: Cambodia’s rising exports of electronic Figure 10: Cambodia’s main export products to and vehicle parts and accessories to Japan the UK market (US$ million) (year to date, y/y percent change) 90 0�2 2017 2018 2019 80 0�15 70 0�1 60 0�05 50 0 40 -0�05 30 -0�1 20 -0�15 10 -0�2 0 May-19 May-18 Jul-19 Sep-19 Nov-19 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 Jan-18 Mar-18 Elect/car parts & Bicycles accessories UK Japan Source: Cambodian authorities. Source: Cambodian authorities. CAMBODIA ECONOMIC UPDATE | MAY 2020 16 Recent Economic Developments and Outlook In contrast, bicycle exports to the UK market In 2019, the construction and real estate sector declined last year. Combined exports of received the largest share of 51 percent of total garment, footwear, bicycles, and travel goods to approved FDI project value, followed by 24 the UK have been in decline since early 2019, percent to the tourism sector (largely investment and at the end of 2019, exports contracted by in construction activity, such as building hotels 12.6 percent y/y (figure 10), reaching US$950 and resorts), and 16 percent to manufacturing million. The United Kingdom left the European (garment, footwear, and travel goods)(figure 12). Union on January 31, 2020.18 In that connection, Investment continues to be biased toward the Cambodia will likely need to negotiate with the non-tradeable sectors, because the export sectors, UK to ascertain whether the UK, after Brexit, except the garment, footwear, and travel goods will continue to provide duty-free and quota-free industry, remain less attractive. This highlights access to Cambodia’s exports, as it did before the need for more effort to promote the country’s Brexit under the Everything But Arms scheme. competitiveness beyond the garment and footwear industry. Approved FDI project value contracted by 52.2 percent in the first two months of 2020 In early 2020, construction activity weakened significantly due to the global COVID-19 The value of approved FDI projects sharply outbreak contracted during the first two months of 2020. In 2019, the value of approved FDI Given the contraction of construction projects already contracted by 9.6 percent (y/y). materials imports, especially steel imports, Of the total approved FDI project values of construction activity is expected to have US$3.5 billion in 2019, roughly 43 percent came decelerated significantly. Imports of steel, from China, which continued to be number one which is largely used in the construction sector, source of FDI (figure 11). While during the past dipped by 47.6 percent (y/y) in the first three several years most FDI inflows had been from months of 2020, while approved FDI project the East Asia region, last year, the second-largest value going to the construction (and tourism) approved FDI value originated from the United sector contracted by 40.2 percent during the same Kingdom, which comprised 23.6 percent of the period. In 2019, the value of the combined steel, total, followed by Hong Kong SAR, China, with cement, and other basic construction material 20.4 percent of total. imports declined to 730 billion riels (US$179 million), down from 830 billion riels (US$204 The majority of approved FDI continued to million) in 2018 (figure 13). In contrast, the go to the construction and real estate sector Figure 11: Approved FDI by country of origin Figure 12: Approved FDI project values (percent share, 2019) (percent of total, 2019) TaiwanUnited France Wholesale/retail Agriculture & food Netherlands processing S� Korea 1�7% States 0�2% 0�2% 2% 1% 0�6% 0�2% Japan 8�5% Garment United 16% Kingdom Tourism 23�6% Malaysia 24% Manufacturing 0�1% 6% Hong Kong 20�4% Singapore 0�4% Thailand 0�3% China 43�9% Vietnam Real estate 0�1% 51% Source: Cambodian authorities and World Bank staff estimates. Source: Cambodian authorities and World Bank staff estimates. 18 See https://ec.europa.eu/info/european-union-and-united-kingdom-forging-new-partnership_en. 17 CAMBODIA ECONOMIC UPDATE | MAY 2020 Recent Economic Developments and Outlook approved construction permit value skyrocketed, on jobs, given that the latest construction reaching US$11.4 billion (4,793 projects) in 2019, boom consists in large part of work on luxury up from US$5.7 billion (3,294 projects) (figure 14) high-rise buildings and is relatively capital in 2018, reflecting a continued strong investment intensive. Unlike the garment, footwear, and appetite. During the first two months of 2020, travel goods sector, the construction (and real the approved construction permit value and areas estate) sector provides roughly about 200,000 grew at 46 percent and 33 percent, respectively, jobs, so its social impact is relatively mild when reflecting a shift toward investment in luxury the construction booms end. commercial and residential building. As part of the COVID-19 response, the The easing of the construction and real estate authorities have granted an exemption of the sector is greatly diminishing economic ownership transfer tax for property valued at growth. The construction (and real estate) sector US$70,000 or less.19 However, the COVID-19 has been the largest engine of growth in recent outbreak has resulted in unprecedented demand years. In 2019, construction and real estate shocks, while the property market already contributed more than a third of GDP growth. appears well saturated after almost a decade-long Along with the export sector, the construction construction and real estate boom. industry has been one of the main sources of The global COVID-19 outbreak disrupted government revenue from indirect and domestic demand and consumption international trade taxes. Recently, the construction industry has been increasingly financed by FDI Imports of consumable and durable goods inflow. It is estimated that Cambodia received 40 contracted in early 2020. During the first percent of total FDI inflows from mainland quarter of 2020, import of foodstuffs and China and the majority of the inflows channeled motorcycles contracted by 11.4 percent and 3.8 to the construction sector. Construction activity percent, respectively. Reflecting the downturn of significantly weakened after suspension of large the travel and tourism industry, imports of buses, development projects financed by FDI inflows, aviation fuel, and fuel oil declined by 17.8 percent, which are currently interrupted by the global 40.7 percent, and 22.3 percent, respectively. In COVID-19 outbreak. 2019, the demand for consumable goods such as foodstuff, beverages, and petroleum products The end of the construction and real estate was robust. Consumer appetite for durable goods, boom is likely to have a relatively muted impact however, faded. In 2019, imports of gasoline Figure 13: Import of basic construction materials Figure 14: Approved construction permits (billions of riels) (US$ million) Steel Cement Other materials Value (US$ million) 900 Areas (million of square meter, RHS) 800 2,500 4�5 700 4 600 2,000 3�5 500 3 1,500 2�5 400 2 300 1,000 1�5 200 500 1 100 0�5 0 0 0 Jan-Feb 2018 Jan-Feb 2019 Jan-Feb 2020 Jan-Feb2018 Jan-Feb2019 Jan-Feb 2020 Source: Cambodian authorities. Source: Cambodian authorities. 19 Letter 1313, Ministry of Economy and Finance, February 25, 2020. CAMBODIA ECONOMIC UPDATE | MAY 2020 18 Recent Economic Developments and Outlook and diesel rose by 49.4 percent and 65.3 percent, While remaining strong, FDI inflows are respectively. Imports of foodstuff, electronics, and estimated to have slowed to 10.8 percent of medicines also increased, rising by 30.6 percent, GDP in 2019, down from 12.6 percent of GDP in 14.8 percent, and 14.4 percent, respectively. In 2018 when the inflows peaked. Strong FDI inflows contrast, imports of passenger cars significantly and the injection of local currency allowed the moderated to 13.9 percent in 2019, down from central bank to continue to accumulate increased 72.7 percent in 2018. Similarly, the growth of international reserves, which reached US$18.7 imports of motorcycles decelerated to 11.4 billion by December 2019, or 28.3 percent percent, down from 21.4 percent in 2018. growth y/y, covering more than seven months of prospective imports. Efforts to promote the The current account deficit remained stable use of local currency, the Cambodian riel, in and fully financed by FDI last year Cambodia’s highly dollarized economy by the The current account deficit is estimated central bank paid off. Riels in circulation grew at to have remained at 8.8 percent of GDP as 31.3 percent y/y in 2019, up from 11.5 percent in both exports and imports eased last year. As 2018, while the riel versus U.S. dollar exchange rate discussed above, Cambodia’s key merchandise remained stable (see a more detailed discussion on exports eased in 2019 due mainly the contraction the measures to promote the local currency in the of exports to the EU market. Likewise, monetary sector below). merchandise imports, especially durable goods However, like domestic revenue collection, imports, decelerated as domestic demand started Cambodia’s international reserves position to weaken. In 2019, despite experiencing relatively is also projected to shrink this year, given the slow growth, exports of total goods and services country’s key foreign exchange earning sectors, are estimated to have remained solid, accounting tourism and exports, are being hit hard by the for 61.4 percent of GDP, slightly lower than outbreak, while FDI inflows are also slowing. In 2018’s 61.6 percent of GDP, of which service 2020, the country’s foreign exchange reserves are exports, consisting largely of tourism receipts, expected to decline to US$16.8 billion (6.8 months covered 15.2 percent of GDP, slightly below of prospective imports), down from US$18.7 2018’s 15.5 percent of GDP. Goods and services billion (7.6 months of prospective imports). imports also declined, accounting for 62.8 percent of GDP, down from 63.3 percent in 2018. The agriculture sector’s contribution to GDP growth contracted in 2019 FDI inflows decelerated in 2019 Figure 15: Agricultural growth Figure 16: Rice cultivated area and production (at constant 2000 prices, percent) 7 12 Production (million tons, RHS) 4 6 Planting area (million of ha) 3�5 10 5 3 4 8 2�5 3 6 2 2 1�5 4 1 1 0 2 0�5 -1 0 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Cambodian authorities. Source: Cambodian authorities. Note: RHS = right-hand scale. 19 CAMBODIA ECONOMIC UPDATE | MAY 2020 Recent Economic Developments and Outlook Agriculture’s contribution to GDP growth season rice cultivation has been relatively slow.21 As contracted for the first time last year since a result, total rice production during the 2019–20 2004 (figure 15). During the past several harvesting season reached 10.885 million metric years, agricultural expansion has decelerated. tons, marginally lower than the 10.892 million tons Agriculture’s contribution to GDP ceased to produced during the 2018–19 harvesting season.22 increase as rice production was hit by a prolonged In addition, yield also marginally declined by 0.5 drought lasting from 2013 to 2015 (figure 16), percent, reaching 3.09 metric tons per hectare. resulting in a large number of Cambodian farmers The agriculture sector is unlikely to be able migrating to find employment in the neighboring to substantially absorb laid-off workers from countries, particularly Thailand, where wages the tourism and export sectors were several times higher. Thanks to improved weather conditions, the agriculture sector started The weak performance of the agriculture to expand again during the period 2016-18. sector will make it harder for the sector to absorb laid-off workers from the tourism and Crop production, especially rice, continues export sectors. The global COVID-19 outbreak to account for the majority (60 percent) of has already severely impacted the services sector, agricultural GDP. Cambodia had been relatively especially the hospitality and tourism industry, less successful in diversifying agricultural products which provides 620,000 jobs. The transport and to higher-value-added crops, fisheries, and travel industries are on the brink of collapse livestock due largely to relatively slow adoption of because of overseas travel restrictions and urban modern agricultural technology, including input center lockdowns triggered by the outbreak. The use and irrigation.20 Sustaining agricultural growth downfall of the tourism and hospitality industry will have to come from yield improvements. As is impacting jobs and incomes of workers yield has now reached around 3.3 metric tons per and businesses of the tourism and hospitality hectare, further improvements will be increasingly industry. In this connection, the authorities have difficult, unlike a decade or more ago when yield introduced a wage subsidy of US$40 a month was low at about 2.0 metric tons per hectare. for unemployed people across the tourism sector Moreover, land cultivation area expansion is (and then the export sector) including workers constrained by Cambodia’s limited arable land. in hotels, guesthouses, and restaurants, and tour Recent efforts to modernize the agriculture operators.23 This should partly help prevent them sector have intensified as Cambodia endeavors from falling back into poverty. to increase productivity within its major crops. In the absence of significant mitigation In this regard, there are signs that the sector is slowly measures, the COVID-19 pandemic could modernizing by leveraging advanced cultivation lead to a sharp increase in poverty. Poverty techniques and new seeds made possible by simulations show that poverty would increase technology diffusion via foreign direct investment. between 1 and 5 percentage points from a 50 While it is still too early to draw conclusions, percent income loss that lasts for three months Cambodia’s exported agricultural products have for households engaged in tourism, wholesale slowly expanded to include new products such and retail trade, garment, construction, or bananas and mangos to destinations beyond its manufacturing, or between 3 and 11 percentage immediate neighbors, Thailand and Vietnam. points from an income loss that lasts six months. This year’s rice production has been slow due Returning migrant workers will put further largely to less favorable weather conditions. pressure on Cambodia’s shrinking job market Like rainy season rice production, this year’s dry 20 See World Bank 2015a. 21 MAFF 2020a. 22 MAFF 2020b. 2019–20 Annual report, Ministry of Agriculture, Forestry and Fisheries. 23 The Ministry of Tourism reportedly announced US$2.4 million in wage subsidies for the approximately 30,000 workers who have lost their jobs out of the almost 630,000 who work in the tourism sector, due to the ongoing COVID-19 crisis. See https://www.khmertimeskh.com/711331/covid-19- unemployment-response-now-extended-to-tourism-workers/. CAMBODIA ECONOMIC UPDATE | MAY 2020 20 Recent Economic Developments and Outlook Returning migrants from Thailand,24 percent, compared with 1.9 percent in December and their households that relied on their 2018. During the same period, other sub-indexes, remittances, are also likely to face significant namely including housing and utilities as well as income losses and elevated risk of falling into transport and telecommunications, also edged up, poverty. Remittance inflows are expected to slow rising to 1.6 percent and 1.7 percent, up from 0.4 substantially as migrant workers have returned percent and -2.4 percent, respectively. (and those who remain abroad may have less Similarly, regional inflation has eased, after income due to the global economic slowdown) to edging up slightly in late 2019 (figure 18). Cambodia (see box 2). Given that the agriculture Inflation in the East Asia and Pacific region sector provides livelihoods for most of the poor, eased, with low inflation expectations caused further efforts to diversify the agriculture sector by a sharp tightening in financial conditions as and rural households’ incomes, as well as to the COVID-19 outbreak expanded across the promote agroprocessing, are needed to continue region and the world. To respond to slowing reducing poverty, which is concentrated in the economic activity amid subdued inflation, East rural areas. Asia and Pacific region countries Malaysia, the Reflecting the impact of the COVID-19 Philippines, Thailand, and Indonesia moved outbreak, inflation was subdued in the first toward accommodative monetary policies.25 quarter of 2020 Broad money growth declined as foreign Inflation, which inched up to 3.1 percent currency deposits slowed by end-2019, mainly due to elevated food Due largely to the deceleration of foreign prices (figure 17), has since eased. By March currency deposits caused by a tapering of 2020, inflation decelerated to 2.8 percent y/y capital inflows, broad money growth eased due mainly to sluggish demand and domestic to 18.0 percent by the end of 2019, compared consumption caused by the COVID-19 outbreak. to 24.0 percent in 2018. While foreign currency All sub-indexes of Cambodia’s Consumer Price deposits remained the largest contributor to broad Index basket, except the food sub-index, eased money growth, the contribution almost halved to as domestic demand collapsed. By the end of 12.7 percentage points by end-2019, down from 2019, the food and non-alcoholic beverage sub- 22.06 percentage points in 2018, caused by the index of Cambodia’s inflation basket rose to 3.4 Figure 17: Inflation, which inched up by end- Figure 18: Inflationary pressures have picked up 2019, has since eased in regional and major economies (Contributions to 12-month inflation (percent) (end of period, y/y, percent) Food sub-index Housing & Cambodia China 8 Transport sub-index utilities sub-index Vietnam Thailand 7 Y/Y Others 6 Malaysia US 6 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 -3 Jul-15 Jul-16 Oct-16 Jan-17 Jul-17 Oct-17 Jul-18 Jan-15 Oct-18 Jul-19 Oct-15 Jan-19 Oct-19 Apr-15 Jan-16 Apr-16 Apr-17 Jan-18 Apr-18 Apr-19 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Source: Cambodian authorities. Source: World Bank 2019d (October), World Bank, Washington, DC. 24 An estimated 80,000 migrant workers have returned to Cambodia since the COVID-19 outbreak as of April 2020. 25 World Bank 2020. 21 CAMBODIA ECONOMIC UPDATE | MAY 2020 Recent Economic Developments and Outlook Box 2. Recent global developments Global growth declined to 2.4 percent in 2019, the slowest growth rate since the 2008–09 global financial crisis (figure B2.1). Global growth remained weak in 2019-Q4, reflecting mixed performance in major economies. The U.S. economy grew 2.1 percent in 2019-Q4 (quarter-on-quarter seasonally adjusted annual rate [q/q SAAR]), but growth in the Euro Area fell to 0.4 percent in 2019-Q4 (q/q SAAR), its slowest pace since 2013. Activity in Japan contracted 7.1 percent in 2019-Q4 (q/q SAAR) due to the increase in the value-added tax from 8 to 10 percent on October 1st and the impact of Typhoon Hagibis. At the start of 2020, the global economy was showing incipient signs of recovery. The global composite Purchasing Managers’ Index (PMI) rose to a 10-month high of 52.2 and the manufacturing PMI reached a nine-month high of 50.4 in January 2020. Global goods trade registered its first positive growth in December 2019 following six months of consecutive contraction, and indicators in January, such as the PMI New Export Orders index, suggested a nascent recovery in global trade, spurred by reduced trade policy uncertainty amid progress in U.S.-China trade negotiations. However, a pickup in global economic activity has been disrupted by the global pandemic and various mitigation measures implemented first in China and later in the rest of the world to slow the spread of the coronavirus. In China, output contracted sharply in the first quarter. New cases peaked in mid-February and activity started to recover in March following a relaxation of the domestic lockdown. In the rest of the world, activity deteriorated sharply in the latter part of 2020-Q1. The global composite PMI excluding China fell by 12.5 points to 37.6 in March. This was the steepest single-month decline ever recorded, which brought the index to its lowest level since January 2009 (figure B2.2). Figure B2.1: Global economic growth rates, Figure B2.2: Composite PMI, 2019-20 2010–19 (percent) Index, 50+=expansion World Global ex� China Advanced economies EMDE excl� EAP 55 8 50 6 45 4 40 2 35 0 30 -2 25 -4 20 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 201903 201907 201911 202003 Source: Haver Analytics; World Bank. Source: Haver Analytics; World Bank. Preliminary data point to a sharp contraction in global trade, reflecting major disruptions in international travel, tourism, and supply chains. The outbreak hit global trade just as it was recovering from its multiyear low level in 2019 weighed down by trade tensions and subdued global economic growth. Activity at ports fell in February to multiyear low levels (figure B2.3). The travel restrictions and risk aversion have weighed on global tourism and travel. The global New Export Orders index registered 46.6 percent in March, a decrease of 3.7 percentage points compared to the February reading of 45.2 percent (figure B2.4). Manufacturers’ stocks of purchases fell in March, while suppliers’ delivery times continued to rise, pointing to bottlenecks in supply chains. Global financing conditions abruptly tightened. Global equity markets have fallen sharply as the coronavirus outbreak has accelerated globally. Flight-to-safety flows pushed the yield of the benchmark 10-year U.S. Treasury below 1 percent for the first time ever on March 4th, while spreads on higher-risk debt have widened. Markets remain highly volatile, with the Chicago CAMBODIA ECONOMIC UPDATE | MAY 2020 22 Recent Economic Developments and Outlook Figure B2.3: Global trade, 2016-19 Global grade Figure B2.4: Global new export orders, 2019-20 growth, volumes Index, 50+=expansion (percent) Global ex� China 55 China 2000-18 average 6 50 45 4 40 35 2 30 25 20 0 201904 201908 201912 202004 2016 2017 2018 2019 Source: Haver Analytics; World Bank. Source: Haver Analytics; World Bank. Notes: Dow Jones global index (December 31 1991=100. United States CBOE volatility index [VIX]. Board Options Exchange’s (CBOE) Volatility Index (VIX) tripling in March, on average (figure B2.5). Central banks around the world have aggressively eased monetary policy and provided liquidity support to avoid shortages in credit markets. In a pair of emergency meetings, the Federal Reserve cut its policy interest rates to close to zero. Emerging markets and developing economies (EMDEs) have experienced large capital outflows amid flight to safety. EMDE assets have been under significant pressure. Capital outflows from EMDEs exceed the worst period of the global financial crisis. Spreads on sovereign and corporate bonds have risen as a result, and most EMDEs have experienced drastic falls in domestic stock market indexes and currency values. Stock markets in the largest EMDEs have fallen by about a quarter, on average, since the start of the year. Markets expect central banks to provide significant additional monetary easing in the near term. Commodity prices have fallen sharply. Oil prices have fallen more than 60 percent since January 20th (the date human- to-human transmission of the coronavirus was first publicly confirmed), with West Texas Intermediate (WTI), the U.S. benchmark, dropping to around US$20 per barrel in mid-March. Containment measures taken to control the outbreak have resulted in a sharp decline in travel and therefore oil demand. The fall in oil prices has been exacerbated by the collapse of the production agreement between the Organization of the Petroleum Exporting Countries (OPEC) and its partners, including Russia. Industrial metals prices have also declined, with significant falls for copper and zinc (approximately -25 percent). Agricultural prices have been less affected, with the price of the three main grains down by 6 to 11 percent (figure B2.6). Figure B2.5: Dow Jones Global Index and United Figure B2.6: Commodity price indexes, 2014–20 States CBOE Volatility Index (VIX), 2007–20 Index Index, nominal term, 2010=100 200 Dow Jones Global Energy Agriculture Metals&Minerals U�S� CBOE Volatility Index [VIX] 125 150 105 85 100 65 50 45 0 25 Oct-15 Jul-16 Oct-18 Jul-19 Jan-15 Apr-17 Jan-18 Apr-14 Apr-20 Feb-16 Feb-17 Feb-18 May-08 Mar-12 Mar-13 Mar-14 Mar-15 Apr-09 Apr-10 Apr-11 Jan-19 Jan-20 Source: Haver Analytics; World Bank. Source: Haver analytics; World Bank. Notes: Dow Jones global index (December 31 1991=100. United States CBOE volatility index [VIX]. Note: This box was prepared by Ekaterine Vashakmadze, PG. 23 CAMBODIA ECONOMIC UPDATE | MAY 2020 Recent Economic Developments and Outlook tapering of capital inflows. Thanks to the initial establish a benchmark rate of local currency success of the authorities’ policy to promote borrowing and a supported rising demand for the use of the local currency, the contribution local currency as the central bank has succeeded of riels in circulation to broad money growth in its efforts to promote the use of local currency. almost tripled, rising to 3.2 percentage points, As a result, claims on deposit money banks rose up from 1.2 percentage points in 2018. Likewise, to almost 4,000 trillion riels by the end of 2019, the contribution of riel deposits in broad money up from 470 trillion riels at the end of 2018. growth also edged up, rising to 2.0 percentage This partly helped accumulate gross international points, up from 0.6 percentage points during the reserves, which reached US$18.7 billion, or a same period (figure 19). 28.0 percent y/y growth, up from 20.0 percent in 2018. However, Cambodia’s international reserves Pressure on the exchange rate is rising position in 2020 is also projected to deteriorate, As the central bank has increasingly injected given the country’s key foreign exchange earners, local currency, pressure on the exchange tourism and exports, are being hit hard by the rate has risen, likely reflecting the tapering of outbreak, while FDI inflows are also slowing. capital inflows (figure 20) in the highly dollarized During the first 11 months of 2019, 3.4 trillion economy. This is a new challenge in the time of riels were supplied by the central bank to mainly the global COVID-19 outbreak, when the tapering commercial banks. This was equivalent to US$838 of capital inflows together with the decline of million, an almost fourfold increase compared to Cambodia’s foreign exchange earnings caused by 2018.26 The LPCO carried interest rates of 2.81 the downturn of the tourism and export sectors percent, 2.84 percent, and 3.08 percent for 3 are building up pressure on the country’s foreign months, 6 months, and 12 months, respectively. reserves. As the central bank conducts prudent Due largely to the tapering of capital inflows, the market operations to stabilize the exchange rate, riel has slightly depreciated against the U.S. dollar. the demand for U.S. dollars will likely increase. The riel-to-U.S. dollar exchange rate reached 4,099 Without additional foreign exchange injection, to 1 by April 2020, compared with riel 4,018 to 1 the riel is likely to depreciate against the dollar. at the end of 2018. In April 2020, the riel also Recently, a facility called the Liquidity-Providing marginally appreciated against the Thai baht but Collateralized Operation (LPCO) has helped Figure 19: Contribution to broad money growth Figure 20: Riel in circulation and riel compared to the U.S. dollar exchange rate (percentage points) (y/y, percent change) Riel in circulation Riels/U�S� dollar exchange rate (RHS) Riel deposits Riels in circulation Foreign currency deposits 40 3 45 Broad money (y/y, percent change) 35 2 40 35 30 1 30 25 0 25 20 -1 20 15 15 -2 10 10 -3 5 5 -4 0 0 -5 -5 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jan-13 May-16 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Dec-15 Oct-16 Mar-17 Aug-17 Jan-18 Jul-15 Jun-18 Nov-18 Apr-19 Sep-19 Source: Cambodian authorities. Source: Cambodian authorities. Note: RHS = Right-hand scale. 26 National Bank of Cambodia 2019. CAMBODIA ECONOMIC UPDATE | MAY 2020 24 Recent Economic Developments and Outlook depreciated against the Vietnamese dong (figure 1.4 percent, 0.7 percent, and 0.4 percent in 2018, 21). Against the currencies of Cambodia’s main respectively. export markets (besides the United States), the Rising domestic bank credit to the riel marginally appreciated against the euro, the construction, real estate, and mortgage Canadian dollar, and the British pound. In 2019, sector, however, continued Cambodia’s nominal and real effective exchange rate appreciated, which indicates a relatively Bank credit growth continued to be driven appreciated value of local currency against the largely by rapidly rising loans to construction, weighted basket of currencies of Cambodia’s real estate, and mortgage businesses. The trading partners. contribution of the combined construction, real estate, and mortgage businesses to bank credit By the end of 2019, growth of (net) bank growth accelerated, reaching 11.0 percentage credit to businesses eased for the first time points, up from 9 percentage points at the end since mid-2018 of 2018. Similarly, the share of bank credit going For the first time since mid-2018, growth of to the combined construction, real estate, and net domestic bank credit27 to the private sector mortgage businesses in outstanding bank credit decelerated to 21.3 percent in 2019, down from rose further to 31.1 percent or US$7.7 billion 24.2 percent in 2018. Based on the data on bank by the end of 2019, compared to 27.9 percent credit classified by business undertaking, the or US$5.6 billion at the end of 2018. This is deceleration in bank credit was due mainly to the much larger than the 22.8 percent share when decline in bank credit to (i) the hospitality industry the construction boom went bust triggered by (hotels and restaurants), (ii) the manufacturing the 2008–09 global financial crisis. In addition, sector, and (iii) the agriculture sector (figure 22). the share of bank credit to the private sector was In 2019, the reported nonperforming loan ratios only 24.4 percent of GDP in 2009 (when the were 2.2 percent and 1.1 percent for the banking global financial crisis hit the economy), compared sector and microfinance sectors, respectively.28 to 83.4 percent of GDP in 2019, as financial In 2019, the contribution of hospitality (hotels deepening rapidly expanded in recent years. This and restaurants), agriculture, and manufacturing indicates a substantial increase in risks associated businesses to bank credit growth eased to 0.9 with spillovers from the real sector to the banking percent, 0.5 percent, and 0.2 percent, down from sector. Figure 21: Nominal exchange rate Figure 22: Contribution to growth of domestic credit (percentage points) Riels per baht Riels per 1000 dong Agriculture Others Riels per US$ (RHS) Hotels and Restaurants Wholesale & retail 200 4250 Manufacturing Construction, estate & mortg 190 4200 Total 180 4150 35 170 4100 160 25 4050 150 4000 15 140 3950 130 3900 5 120 110 3850 -5 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 100 3800 Aug-12 Oct-13 May-14 Feb-16 Dec-14 Jan-12 Jul-15 Sep-16 Apr-17 Nov-17 Jun-18 Aug-19 Mar-13 Jan-19 Mar-20 Source: Cambodian authorities. Source: Cambodian authorities. Note: RHS = right-hand scale. 27 Net bank credit is total domestic bank credit to the private sector excluding (i) loans from the monetary authorities to deposit money bank, and (ii) interbank loans by deposit money bank. 28 National Bank of Cambodia 2019. 25 CAMBODIA ECONOMIC UPDATE | MAY 2020 Recent Economic Developments and Outlook Short-term interest rates of riel and U.S. 2020 onward. The benchmark rate of LPCO dollar deposits and loans (except the riel operations (see the more detailed discussion lending interest rate) remain relatively stable. on LPCO operations, above) for all maturities By the end of 2019, the short-term (12-month) was also reduced by 0.5 percent. The NBC also interest rates of riel and U.S. dollar deposits were decided to postpone full implementation of the at 4.34 percent and 5.42 percent, respectively, Capital Conservative Buffer and to maintain the compared to 4.38 percent and 5.87 percent, 50 percent current requirement, cut the interest respectively, at the end of 2018. During the same rate on negotiable certificates of deposit for period, the short-term interest rate for U.S. dollar both riels and U.S. dollars at an appropriate level, loans was 9.51 percent, compared to 9.74 percent. and reduce the minimum requirements of the However, the short-term interest rate of riel loans Liquidity Coverage Ratio to an appropriate rate.29 significantly declined to 10.62 percent by the end Implications for domestic revenues of 2019, down from 13.5 percent at the end of 2018, thanks to the initial success of the central The COVID-19 outbreak is hitting Cambodia’s bank’s policy to promote the use of local currency, revenue base. The export and construction discussed above. sectors are the main source of direct revenue and indirect (and international trade) revenue, In response to the COVID-19 outbreak, respectively. The least affected agriculture sector the National Bank of Cambodia (NBC), is tax-exempt. It is highly likely that revenue conducted monetary policy easing, and collection in 2020 will be significantly below the several measures have been introduced. In budget target. The overall fiscal deficit (including March 2020, the reserve requirement rate was grants) is therefore projected to widen to 9.0 reduced to 7 percent for both local currency and percent of GDP in 2020 (figure 23), down from foreign currency, down from 8 percent for local a surplus of 0.5 percent in 2019 (see Annex 2 currency and 12.5 percent for foreign currency for Cambodia’s key macroeconomic indicators). and domestic currency, respectively, from April The shortfall in domestic revenue collection will Figure 23: The outbreak is projected to hit hard Figure 24: Revenue (including grants) peaked in this year’s fiscal performance after 2019 budget surpluses General government operations (percent of GDP) (percent of GDP) Total revenue Total expenditure Grants Other Revenues Forecast 30 Non-Tax Revenues Taxes on International Trade 30 Overall balance (including grants) 25�4 25�5 Direct Revenues Taxes on Goods & Services 22�7 23�8 24�9 25 21�1 23�4 20�2 21�9 20�9 20 19�7 16�5 20 15 10 5 10 0�4 0�5 0 -0�5 -0�2 -0�8 -5 0 -10 -9�0 2013 2014 2015 2016 2017 2018 2019e 2015 2016 2017 2018 2019e 2020f Sources: Budget settlement laws; World Bank staff estimates Sources: Cambodian authorities; World Bank staff estimates. and forecast. Note: e = estimates. Note: e = estimates; f = forecast. 29 The capital conservation buffer is designed to ensure that institutions build capital buffers under normal financial situations that can be drawn down when losses occur. When the buffer is drawn down, the institutions shall rebuild it as soon as possible. If the institution cannot rebuild it immediately, it shall submit to the National Bank of Cambodia a “capital management plan” explaining the methods and determining the date it intends to build its capital conservation buffer. See NBC’s Prakas dated February 22, 2018. https://www.nbc.org.kh/download_files/legislation/prakas_eng/3.Prakas_ on_Capital_Buffer_in_BFIs_ENG.pdf. CAMBODIA ECONOMIC UPDATE | MAY 2020 26 Recent Economic Developments and Outlook require the authorities to dip into government increased spending on goods and services (non- savings, and the domestic financing need is wage recurrent spending), overall public outlay projected to amount to about 5 percent of GDP. rose and is estimated to have reached 24.9 percent In 2019, government savings stood at 20.2 percent of GDP, compared to 23.4 percent of GDP in of GDP (or 22.2 trillion riels) after several years 2018 (figure 25). Wages and compensation, which of accumulation. Given the authorities’ ample had been rapidly rising during the past several liquidity, recourse to domestic (central bank) years, (due to the authorities’ across-the-board financing to fill the widening overall fiscal deficit increase of the monthly minimum wage of civil is not expected. servants to at least 1.0 million riel, equivalent to US$250), declined, and are estimated to reach 7.0 Revenue collection peaked last year percent of GDP. The decline was due in part to a In 2019, total revenue (including grants) reclassification. Budgetary expenditures of social accelerated and peaked at 25.4 percent of GDP benefits, which consist mainly of social security (figure 24), thanks to continued improvements and social assistance, which were earlier classified in revenue administration. Total revenue (and under the wage and compensation category, have grants) is estimated to have reached 27.8 trillion now been split. riels or US$6.9 billion. The largest contribution Disbursement of capital expenditure is came from taxes on goods and services, estimated to have slowed last year. As a result consisting mainly of the value-added and excise of slower disbursements of externally financed taxes from domestic businesses and goods (motor public investment, capital expenditure is estimated vehicles and machinery, petroleum products, and to have reached only 6.4 percent of GDP in construction materials) imports, which rose to 2019, down from 6.7 percent in 2018. Cambodia 12.6 percent of GDP (a 27.1 percent y/y increase) continues to depend on development partners to in 2019, up from 10.9 percent of GDP in 2018. finance its capital investment. Due to rising public Revenue from direct taxes was next, rising to 4.4 outlay, the share of externally financed capital percent of GDP (a 20.4 percent y/y increase), up spending in total capital spending shrank to 57 from 4.0 percent during the same period. Revenue percent in 2019, down from 65 percent in 2018. from the international trade tax (mainly customs duties and fees) picked up only marginally, During the first two months of 2020, reaching 2.7 percent of GDP in 2019, up from expenditure performance accelerated quickly, 2.4 percent in 2018 due to commitments under thanks for the authorities’ prompt response the ASEAN Free Trade Agreement. to the COVID-19 outbreak. The central government’s disbursement during the first two In the first two months of 2020, revenue months grew faster than in recent years, rising 33.7 collection initially remained resilient, despite percent y/y as disbursements of capital spending the COVID-19 outbreak, which has significantly surged, increasing by almost 50 percent y/y. weakened domestic economic activity and imports. Central government revenues collected during the In response to the COVID-19 outbreak, first two months of 2020 grew at 22.7 percent y/y the 2020 budget was announced by the due mainly to the continued increase in taxes on authorities as an austerity budget goods and services and non-tax revenues, while In April 2020, in response to the COVID-19 direct revenues and taxes on international trade outbreak, the authorities pronounced the were flat. 2020 budget an austerity budget, with actual Expenditure performance also accelerated public outlays expected to shrink to 25.5 percent last year of GDP, down from 26.9 percent in the original 2020 budget. A spending cut from the budgeted Similarly, public outlay disbursement spending on goods and services (non-wage accelerated last year. Thanks mainly to 27 CAMBODIA ECONOMIC UPDATE | MAY 2020 Recent Economic Developments and Outlook recurrent spending) amounting to US$918 million In 2019, the Debt Sustainability Analysis (DSA) was announced in April 2020.30 The savings using the joint IMF/WB Debt Sustainability generated from the budget cut are to be used Framework for Low Income Countries (LIC- to finance rising demands for economic and DSF) showed that Cambodia remained at low social intervention. At the beginning of the year, risk of external debt distress.31 However, the the 2020 budget was introduced as a stimulus baseline has changed since the DSA conducted in budget to mitigate expected negative impacts of 2019. With the fiscal deficit estimated at 9 percent Everything But Arms withdrawal. and 99.6 percent of the debt external (and in an external currency), financing needs from abroad To finance the widening fiscal deficit, public will be large and exchange rate will come under debt is expected to rise to 35 percent of GDP further pressure. by 2022 By the end of 2019, Cambodia had a total While Cambodia’s public debt-to-GDP ratio outstanding public debt of US$7.6 billion (figure remained stable at below 30 percent of GDP 26),32 of which 0.04 percent or US$2.74 million is until 2019, it is projected to increase quickly, public domestic debt. Overall, the borrowing terms starting from this year, as the country’s overall remained highly concessional, with a (weighted fiscal deficit is widening. Cambodia’s debt-to- average) interest rate, maturity, and grade period of GDP ratio is expected to reach 35 percent by the end 0.8 percent, 28.51 years, and 7.87 years, respectively. of 2022. In 2020, the authorities are planning to dip By major currency, outstanding debt in U.S. dollars into government savings, and domestic financing is the largest, accounting for 43.9 percent of total is projected to amount to 5.3 percent of GDP. In outstanding debt. Special Drawing Rights and 2019, government savings stood at 20.2 percent of Chinese yuan are next, covering 25.9 percent and GDP (or 22.2 trillion riels) after several years of 14.6 percent, respectively. accumulation. Given the authorities’ ample liquidity, recourse to central bank financing to finance the China remains the largest creditor, widening overall fiscal deficit is not expected. accounting for almost half of Cambodia’s outstanding debt Figure 25: Public outlays also increased, driven Figure 26: Cambodia’s outstanding public debt, by expenditures on goods and services by creditor (percent of GDP) (US$ million and percent of total) 30 Other Expenditures Capital Expenditures France, Old debt, Interest Payments Goods & services 327�23, 631�68, Others, Wages & compensation 8�3% 25 RoK, 4�3% 217�01, 385�04, 2�9% 20 5�1% Japan, China, 411�29, 3606�72, 15 5�4% 47�5% 6�0 5�8 7�2 10 5�5 ADB, 6�1 4�7 6�1 1431�14, 5 18�8% 6�5 6�8 7�6 8�0 6�9 4�9 5�7 WBG, 586, 0 7�7% 2013 2014 2015 2016 2017 2018 2019e Source: Cambodian authorities and World Bank staff estimates. Source: Cambodian authorities. Note: e = estimates. Note: ADB = Asian Development Bank; RoK = Republic of Korea; WBG = World Bank Group. 30 Instruction circular dated April 8, 2020, Ministry of Economy and Finance. 31 IMF staff report for the 2019 Article IV consultation - Debt Sustainability Analysis. https://www.imf.org/en/Publications/CR/Issues/2019/12/23/ Cambodia-2019-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-48912. 32 Cambodia Public Debt Statistical Bulletin, Vol. 9, March 2020, Ministry of Economy and Finance. CAMBODIA ECONOMIC UPDATE | MAY 2020 28 Recent Economic Developments and Outlook By the end of 2019, Cambodia’s public The collapse of the growth drivers has not only outstanding debt owed to China was US$3.6 hurt economic growth but has also caused billion. This represents 47.4 percent of the total or unemployment to potentially sore to nearly 20 66 percent of bilateral debt. The second- and third- percent. The at least 1.76 million jobs currently largest creditors are multilaterals, namely the Asian at risk due to the COVID-19 outbreak represent Development Bank and the World Bank, covering direct jobs only. The implications for jobs are 18.8 percent and 7.7 percent of total outstanding much greater, if indirect jobs (employment that debt, respectively. Japan became Cambodia’s fourth- is an output of additional activities made possible largest creditor, accounting for 5.4 percent of total by the tourism, export, and construction sectors), debt, displacing the Republic of Korea, which was induced jobs (additional jobs created from the the fifth-largest creditor, capturing 5.0 percent of wider beneficial effects of the three sectors), and total outstanding debt in 2019. Old debts accounted second-order impacts are included. for 8.3 percent of total outstanding debt (of which Under the baseline scenario, real growth is 1.8 percent has been rescheduled). projected to contract by 1.0 percent in 2020 Outlook Growth under the baseline scenario is The economy is being hit hard by the projected to contract by 1.0 percent in 2020 and COVID-19 outbreak to quickly recover to 6.0 percent in 2021, helped by a rebound in global demand (table 1). The base Cambodia’s small, open economy has been case scenario assumes a recovery in global growth hit hard by the global COVID-19 outbreak. As with a gradual pickup in global demand when discussed, the outbreak caused sharp decelerations lockdowns are steadily eased in the second half in most economic activities, and even collapses of of 2020, while domestic economic conditions some that have so far underpinned Cambodia’s improve without significant long-term adverse economic growth. The partial withdrawal of the impact of the lockdowns on the corporate, banking EU’s “Everything But Arms” trade preferential sector or balance of payments. Specifically, the treatment has placed an additional burden on baseline scenario assumes moderate contractions Cambodia’s manufacturing export sector. of Cambodia’s main economic pillars/drivers. In addition, potential spillover effects on First, the services sector, in particular the tourism the microfinance sector are also worrisome. and hospitality industry, has already been severely Data from the 2017 Cambodia Socioeconomic affected and is projected to pick up marginally Survey revealed that about 40 percent of rural during the second half of 2020, boosted in part households were indebted. Given the rapid by the lifting of travel restrictions and lockdowns, financial deepening the country has experienced resulting in very weak growth of the services in the recent past, the current indebtedness rate sector. External demand shocks are intensifying of Cambodia’s rural households is likely to be and likely to lead to the downfall of the garment, higher than 40 percent. As the garment, footwear, footwear, and travel goods sector in the third and travel goods industries largely employ rural quarter of this year. However, the export sector is migrant (female) workers, rural households are expected to slowly recover in the fourth quarter of likely to be disproportionally affected by losses of 2020 onward as the global economy was showing income due to garment, footwear, and travel good incipient signs of recovery from a post-crisis dip factory closures. The Cambodia Socioeconomic prior to the recent coronavirus outbreak (see box Survey also showed that outstanding loans 3 for more details). FDI inflows are projected to and credits from the microfinance (and credit slowly return in the second half of this year. operating) sector accounted for 52.3 percent of debt owed by rural households.33 33 Cambodia Socioeconomic Survey 2017, National Institute of Statistics, Ministry of Planning; https://www.nis.gov.kh/nis/CSES/Final%20Report%20 CSES%202017.pdf. 29 CAMBODIA ECONOMIC UPDATE | MAY 2020 Recent Economic Developments and Outlook Box 3. Global and regional outlook and risks The global economy was showing incipient signs of recovery from a post-global financial crisis dip prior to the recent coronavirus outbreak. The recovery has been supported by reduced trade policy uncertainty and a rebound in global trade flows and investment. The World Bank’s January 2020 Global Economic Prospects projections envisaged global growth edging up to 2.5 percent in 2020 and firming thereafter, reaching 2.7 percent by 2022, predicated on a gradual recovery of investment and trade and a rebound in several major economies that have been gradually emerging from recessions or sharp slowdowns. Prior to the outbreak, growth in advanced economies was forecast to slow to 1.4 percent in 2020 before recovering insignificantly to 1.5 percent in 2021–22. EMDE growth was expected to pick up to 4.1 percent in 2020 and stabilize at 4.4 percent in 2021–22, with the pace of the recovery restrained by soft global demand and structural constraints (World Bank 2020a). The recovery has been interrupted by the coronavirus outbreak. The rapid spread of the coronavirus beyond China has caused significant disruptions to the outlook for the global economy and triggered sharp revisions to consensus GDP growth forecasts in major economies and in most of EMDEs. The pandemic is profoundly affecting the East Asia and Pacific (EAP) economies, but the depth and duration of the shock are highly uncertain (World Bank 2020b). The net impact of the shock on growth outcomes will depend on the duration and depth of the outbreak, external spillovers, and the magnitude and effectiveness of mitigation measures. The recently published World Bank East Asia and Pacific Economic Update presented two scenarios of the regional outlook. In the baseline scenario, a sharp contraction is followed by a sustained recovery, lowering regional GDP growth in 2020 to 2.1 percent, from 5.8 percent in 2019. In this scenario, regional growth stabilizes around its trend level by late 2021. This scenario assumes that the containment of the pandemic allows a sustained recovery of activity, initially in China and later in the rest of the world. The lower case scenario projects a deeper contraction followed by a sluggish recovery. Under this scenario, the pandemic lasts longer and has more severe effects than assumed under the base case scenario. In the baseline scenario, growth in the developing EAP region is projected to slow from an estimated 5.8 percent in 2019 to 2.1 percent in 2020. In the lower case scenario, output will contract by 0.5 percent. Growth in China is projected to decline to 2.3 percent in 2020 in the baseline scenario from 6.1 percent in 2019, whereas in the lower case scenario it could be as low as 0.1 percent. Growth in EAP excluding China is projected to slow from 4.8 percent in 2019 to 1.3 percent in 2020 in the baseline scenario and plummet to -2.8 percent in the lower case scenario. Barring new unexpected shocks and durable financial market stress, the deeper the slowdown, the more rapid the recovery can be expected in 2021. For many countries, the likely financial shocks will significantly exacerbate the economic impact. The most significant effects on both the current and future performance of these countries are likely to originate in financial markets, given the likely magnitude of the financial shock and their existing vulnerabilities. Developing EAP economies are vulnerable in different ways; for example, in China, Vietnam, Malaysia, and Thailand they are vulnerable through elevated domestic debt; in Cambodia, Lao PDR, Malaysia, Mongolia, and Papua New Guinea through external debt; and in Malaysia and Thailand through heavy reliance on short-term debt. Global economic conditions are expected to remain challenging over the forecast period. Global financing conditions are expected to remain extremely complex and volatile. According to the WTO, world trade is expected to fall by 13 to 32 percent in 2020 and will likely exceed the trade slump during the 2008–09 global financial crisis. The ongoing coronavirus outbreak has put additional downward pressure on commodity prices, particularly for energy, which will be further amplified by a surplus of oil supply as OPEC+ members resume full capacity of oil production. The recent fall in oil prices also reflects expectations that demand will be weaker than previously envisioned, as the coronavirus outbreak has already reduced global economic activity as well as air travel and shipping, major sources of oil demand. Other industrial commodity prices have weakened in response to the coronavirus outbreak, with copper prices down by over 20 percent since early January. Overall, metals prices are expected to decline in 2020, reflecting subdued industrial commodity demand, particularly from China. Agricultural prices are envisioned to stabilize in 2020, after declining in the second half of 2019 due to improved supply conditions. The balance of risks to the outlook is firmly tilted to the downside. The main risks include the possibility that the pandemic lingers and has devastating and lasting economic impact on the global economy. In addition, despite large policy support packages, financial market turmoil in advanced economies may persist for several months and cause further capital outflows from the EMDEs. Tighter financing conditions further reduce EMDE growth. This could exacerbate existing balance sheet weaknesses in the highly leveraged economies and could even lead to defaults and financial crises in most vulnerable countries. Global trade could remain depressed for an extended period, causing a disintegration of global and regional value chains. Trade policy uncertainty also continues to represent a risk to the outlook. Note: This box was prepared by Ekaterine Vashakmadze, PG. CAMBODIA ECONOMIC UPDATE | MAY 2020 30 Recent Economic Developments and Outlook Table 1: The macro outlook under the The risks stemming from an overleveraged baseline and downside scenarios financial sector are rising. Several financial sector vulnerabilities could exacerbate the Real GDP growth, at constant prices COVID-19 shock. These vulnerabilities include (y/y, percent change) high credit concentration, related party lending 2020 2021 2022 risks, lack of consolidated cross-border Baseline scenario supervision and gaps in implementation of risk- Agriculture 0.3 0.4 0.5 based supervision.34 Liquidity risks also remain Industry -1.0 9.2 9.3 elevated, as financial institutions rely on funding Services -1.7 5.8 5.8 from abroad, including from parent banks (to GDP growth -1.0 6.0 6.3 banks). The concentration of FDI inflows in a few sectors (namely banking, construction and Downside scenario real estate) combined with bank lending primarily Agriculture 0.3 0.4 0.5 in construction and real estate creates an additional Industry -2.1 7.2 9.3 source of risk. Services -3.9 7.8 6.1 GDP growth -2.9 3.9 6.3 Policy options Source: World Bank staff projections. Policy options in response to the COVID-19 Under the downside scenario, real GDP is outbreak must aim to (i) provide immediate projected to contract by 2.9 percent in 2020 and urgent economic relief and public health protection, (ii) underpin an economic Real GDP is projected to contract by 2.9 recovery in the short term, and (iii) foster percent in 2020 under the downside scenario. macro-fiscal and social resilience in the The downside scenario assumes global lockdowns medium term. The most urgent step is to provide and restrictions continue until the third quarter of support to households to alleviate poverty. This 2020 with moderate to significant adverse effects includes leveraging existing programs and relief resulting in liquidity problem becoming solvency as well as targeting mechanisms to support the problem affecting corporates and ultimately the poor and vulnerable through social assistance to balance of payments. As economic recovery maintain their living conditions. This intervention under the downside or lowercase scenario is policy is being implemented together with the projected to be sluggish, real growth is therefore wage subsidy measure (see box 1). To scale up expected to reach 3.9 percent in 2021. Specifically, Cambodia’s existing social assistance and social Cambodia’s near-term growth outlook under the insurance schemes, after providing immediate downside scenario includes a large contraction relief programs, it is crucial to strengthen the of tourism and hospitality industry activity, with existing mechanism to identify the poor through sustained deflated foreign tourist arrivals due to its IDPoor program. It is critical to continue the the lingering COVID-19 global outbreak for the current core public health response including case rest of 2020. The downside scenario also assumes detection, isolation, contact tracing quarantine. a sizable contraction of Cambodia’s industrial In addition, hand hygiene, cough etiquette, and sector caused by an extended demand shock and physical distancing should continue as important a drastic slowdown in FDI due to prolonged preventive measures. The authorities have financial market turmoil, whereby construction responded well to the first wave of the outbreak. activity remains subdued for the rest of the year. However, as the pandemic is still far from over, However, the downside scenario does not capture Cambodia needs to be ready to respond to a potential financial risks possibly caused by macro- possible future outbreak. financial linkages. 34 Staff report for the 2019 Article IV consultation, IMF. See https://www.imf.org/en/Publications/CR/Issues/2019/12/23/Cambodia-2019-Article- IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-48912 31 CAMBODIA ECONOMIC UPDATE | MAY 2020 Recent Economic Developments and Outlook Effective business continuity plans and use lenders (banks and microfinances). Similarly, of digital technologies are needed to ensure additional capital injection of US$ 50 million for uninterrupted provision of relief programs and the Rural Development and Agriculture Bank service. The plans set out contingency measures has been provided to support agroprocessing to minimize disruptions to the organization’s firms and emerging agribusinesses. However, operations in case of crisis by leveraging emerging the success of the measures hinges on targeting digital and information technologies. Depending appropriate small, medium, and large firms and on the magnitude and severity of impacts of the enterprises that are efficient and viable but lack COVID-19 outbreak, phased implementation of cheaper financing sources to create jobs, to run the plans, which integrates all critical government profitably, and to export. This should also include (administration, finances, and health) functions family and small firms operating in retail and low- should maintain minimum operations, enabling end tourism, where large numbers of informal or the uninterrupted provision of emergency food semiformal firms might either be impacted by the assistance, economic relief, and public health pandemic or not. emergency assistance. The final step is to ensure economic and The effectiveness of government intervention social resiliency in the medium term after the will be essential to facilitate economic outbreak has been brought under control. recovery. The COVID-19 pandemic will likely Refocusing and reenergizing efforts and sources have major implications on how regional and that might have been interrupted or diverted to global trade and investment will be conducted cope with the COVID-19 outbreak to moving going forward, with expected major shifts in forward with key structural and sectoral reforms is trade and migrant policies, and flow of goods crucial. In this connection, attention must be paid and services. There is a need for the authorities and efforts must be made to improve macro-fiscal to think about a future where strengthening resilience, address the vulnerabilities in the financial domestic demand, protecting the local consumer sector, strengthen external competitiveness and purchasing power amid external shocks of public diversification to mitigate the impact of potential health and/or natural disasters, and increasing external shocks, while ensuring readily available production for domestic consumption, are the social protection and relief programs that can way to move forward. In this regard, intervention be quickly activated and/or scaled up during an measures recently introduced by the authorities emergency. To achieve economic resiliency, it include tax relief, and improved access by small is necessary to further promote ease of doing businesses and household enterprises to cheaper business, the investment climate, and a reduction credit using co-financing facilities between the of energy and logistics costs to reintegrate with newly established Small and Medium Enterprise regional and global value chains after a period of Bank of Cambodia (SME Bank) and commercial interruption caused by the outbreak. CAMBODIA ECONOMIC UPDATE | MAY 2020 32 Special Focus: Teacher Accountability and Student Learning Outcomes Special focus: Teacher Accountability and Student Learning Outcomes Special focus: Teacher Accountability and Student Learning Outcomes35 Case Studies of Selected School Models accountability and governance. SBM focuses on strengthening accountability toward community. Strengthening Accountability to Improve the The two new school models have shown that Quality of Education36 introducing a new level of accountability systems Introduction has led to higher learning outcomes. It is widely recognized that education is the The provision of quality education services key for human development and sustainable is important to encourage community growth. The Royal Government of Cambodia participation, which in turn will further has implemented key reforms to bring education improve the education system. Education to the next level, albeit from a low base, leading impacts the life of both students and parents, whose to significantly increased access to education main interests are their children’s educational over the last two decades. Consistent efforts attainment. When parents’ participation is required have also been made to improve the quality of to improve their children’s education attainment, the education system and education services by parents have a natural tendency to do so. Active increasing education expenditure and important citizens/community’s participation encourage step has been taken to improve standard of more accountability and ultimately contribute to living for education staff. As a result, the average the improvement of the whole education system. starting salary of teachers approximately tripled Efforts at improving quality of education is from 2013 to 2019. also impacted by Covid-19 pandemic. Covid-19 However, achieving quality in terms of is a public health emergency, which has severe student learning outcomes remains a major economic and social impacts. Education sector challenge. Overall, student learning outcomes is not spared from its impacts. Students learning remained low and did not improve from 2013 and various form of assessments are interrupted to 2017, according to the National Student by the shutdown of schools. Interruption to Assessments conducted from 2013 to 2017. The student learning is likely to have impact on National Student Assessments are considered quality of learning and human capital growth scientific studies to evaluate student learning of the affected cohort.37 Quality of learning is outcomes at grades 3, 6, 8, and 11. The assessments related to instructional hours provided. Amount suggest that students in grades 6 and 8 can answer of learning time lost due to school closure has only about half the questions correctly. implication for skill growth with variation across the affected groups including the vulnerable and The government introduced two new school disadvantaged communities. This necessitates models in its public school system, the New further investment in technology and reforms Generation School (NGS) and School-Based in education to support continuity of quality Management (SBM), with the aim of raising learning during lockdown and beyond (See box school accountability and bringing the quality S.1 for more discussion on Covid-19’s impacts on of learning to the next level. NGS receives reform effort in education sector). additional investment linked to new standards of 35 This special focus section was prepared by a team co-led by Sokbunthoeun So (Senior Public Sector Specialist) and Donna Andrews (Senior Public Sector Specialist). Core team members include Khy Touk (Consultant), Sokunpanha You (Consultant), Pisith Phlong (Consultant), Fata No (Consultant), and Sodeth Ly (Senior Economist). The authors thank Simeth Beng for thoughtful suggestions and advice. A Multi-Donor Trust Fund on Public Financial Management and Service Delivery contributed by Australia and the European Union, which finance the preparation of this special focus section, is gratefully acknowledged. 36 Unless otherwise noted, the analysis in this special focus section is based on findings from the World Bank’s study on “Accountability, Incentives and Learning Outcomes: Case Study of Selected School Models.” 37 See Simon Burgess and Hans Henrik Sievertsen, “Schools, skills, and learning: The impact of COVID-19 on education” CEPR Policy Portal https:// voxeu.org/article/impact-covid-19-education 35 CAMBODIA ECONOMIC UPDATE | MAY 2020 Special focus: Teacher Accountability and Student Learning Outcomes Box S.1 Covid-19 pandemic and its impact on education sector The Royal Government of Cambodia has taken important student learning is limited as experience showed, it is very steps including school closure to prevent the spread of likely that students do not learn at the expected level. Covid-19. Enabling remote learning has been the main Second, student drop-out rate may increase in the alternative for various schools and educational institutions. medium term (2 to 3 years). The economic impact on Initiatives including online, TV or radio based learnings were community in combination with school closure as well put in place to support continuity of students’ learnings in as learning loss are likely to make the students drop-out public and private schools. rate higher. As experience showed, students drop-out rate The Covid 19 pandemic has negatively impacted the increased when community livelihood is more vulnerable education sector reform efforts. The closure of schools and students lag far behind their learnings. during the Covid 19 pandemic is likely to further impact Third, assessment of student learning outcomes was the education sector in the medium and longer term, if no delayed. The National Student Assessments in 2020 was mitigation is put in place. delayed. This delay will result in inadequate information for First, student learning is likely to lag behind due the government in updating the policy to improve students’ to learning loss during school closure. Despite the learning outcomes. mitigation measures, distance learning has proved to Fourth, teacher effectiveness may be lower after Covid be a challenge to keep the level of learning attainment. 19 pandemic due to discontinuity of teaching activities. For example, while it is helpful to make e-lesson video With ineffective accountability in place and limited capacity for students, this kind of lessons could reach only those of teachers in working from distance, teachers are not students who are able to absorb the learning independently likely to be able to communicate with parents and provide or those students whose parents are able to provide support distance support to student during school closure. Policy in their learning. Most students lack materials to be able to initiative could be introduced to help teachers prepared for benefit from such kind of distance learning. TV and radio supporting students who are lagged behind as a result of based learnings do not provide sufficient interaction during school closures. the learning sessions. Given that parents’ engagement in Sources: The Covid-19 Pandemic: Shocks to Education and Policy Response, World Bank, May 2020. Continuous learning guideline for the “Distance Learning” and “E-learning” Programme for students from Pre-Primary, Primary and Secondary Education, World Bank 2020. Concept paper on “Higher Education Improvement Project” World Bank, May 2020. CAMBODIA ECONOMIC UPDATE | MAY 2020 36 Special focus: Teacher Accountability and Student Learning Outcomes This special focus section discusses Plan, Education for All National Plan, National accountability of public schools as well as Policy on Child Care, and Child Friendly School the new selected school models. Drawing on policy to prioritize early childhood education NGS and SBM’s experience, recommendations and improve access, efficiency, and quality of are offered to improve the quality of education basic education for nine years. As a result, there in Cambodia. Additional recommendations to has been a notable improvement in access to address impact of Covid-19 on education sector education. The net enrollment rate in primary are also provided. school reached 97.8 percent in 2018, up from 76.4 percent in 2000 (figure S.1). The secondary school Efforts to bring the education sector to the net enrollment rate rose from 16.6 percent in 2000 next level to 35.1 percent in 2011 and to 59 percent in 2018. 1. Access to education has been expanded The completion rate at the lower secondary level reached 46.5 percent in 2018 (figure S.2).39 The education sector plays a crucial role in national development. The general education 2. Salaries for teachers and education staff system requires 12 years of study, including have been increased 6 years of primary school, 3 years of lower The government relies on teachers to deliver secondary school, and 3 years of upper secondary education services. As part of the agenda school. In 2018, Cambodia had 13,113 schools to credibly increase the salary of government across the country, providing education services officials across the board, the government has to approximately 3 million students representing taken the important step of increasing spending 18.75 percent of the population. The sector on education, and in particular for teacher salaries. employed 120,155 staff of which around 99.5 Spending on education as a proportion of total percent (119,804) are teachers.38 government expenditure surged from 10 percent In recognizing the importance of developing in 2014 to an estimated 13 percent in 2019, the education sector, the Royal Government reaching 2.9 percent of GDP in 2019, compared of Cambodia introduced a series of policies with 2 percent in 2014.40 in the 2000s, including the Education Strategic Figure S.1: Net enrollment rate at primary level Figure S.2: The completion rate in lower has surged over the last two decades, secondary thanks to government policy to expand access to education (percent) 105% 55% 100% 50% 95% 90% 45% 85% 40% 80% 35% 75% 70% 30% 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 20 -07 20 -08 20 -09 20 10 20 -11 20 -12 20 -13 20 -14 20 -15 20 -16 20 -17 8 -1 - 06 07 08 09 10 11 12 13 14 15 16 17 20 Source: MoEYS. Source: MoEYS. 38 Ministry of Education, Youth, and Sports (MoEYS). 39 ESP 2019–2023, June 2019; MoEYS. 40 Budget Law, 2020. 37 CAMBODIA ECONOMIC UPDATE | MAY 2020 Special focus: Teacher Accountability and Student Learning Outcomes According to the 2020 Budget Law, spending 3. However, student learning outcomes on education41 in nominal terms nearly tripled have not improved from US$343 million in 2014 to US$848 million Despite a significant increase in teacher in 2019.42 The increase is mainly attributable to salaries, student learning outcomes showed a rise in government personnel wages, which no substantial improvement from 2013 to accounted for approximately 80 percent of total 2017. The 2018 Ministry of Education, Youth, expenditures. Within the same period, the starting and Sports (MoEYS) study on Education in salary for teachers approximately tripled; for Cambodia: Findings from Cambodia’s experience in primary teachers it quadrupled (from US$888 to PISA for Development found that the performance US$3,600 per year); for lower secondary teachers of students in Cambodia was yet to reach the level it tripled (from US$1,259 to US$3,876 per year); expected. Only a low percentage of Cambodian and for higher secondary teachers it increased by students age 15 achieve a minimum level of 2.3 times (from US$1,814 to US$4,222) (figure proficiency43―8 percent in reading and 10 percent S.3). in mathematics. Students in Cambodia performed Teacher salaries have been mainly driven below the ASEAN average scores in reading, by two main components: the basic salary mathematics, and science. On average, the PISA-D and a functional allowance. For example, the scores for Cambodia were 321 for reading, 325 base salary for primary school teachers tripled, for mathematics, and 330 for science, which are reaching US$1,860 per year in 2019 from US$684 lower than the ASEAN average scores of 430 for in 2013. The functional allowance has been the reading, 435 for mathematics, and 439 for science. key factor driving teacher pay increases (figure Less than 2 percent of Cambodian students S.3). Improvements have also been made in performed at the average competency level of how often teachers are paid. Whereas they were Organization for Economic Co-operation and previously paid on a monthly basis, they are now Development (OECD) countries. In reading, they paid biweekly with direct transfers to their bank performed significantly lower than the PISA-D accounts. average (346 points).44 Figure S.3: The starting salary for teachers tripled between 2013 to 2019, driven mainly by a surge in functional allowance Panel A. Starting annual salaries for primary and secondary teachers Panel B. Starting annual salaries for primary teachers $4,500 Primary Lower Secondary Upper Secondary $4,000 Basic salary Functional allowance $4,000 $3,500 $3,500 $3,000 $3,000 $2,500 $2,500 $2,000 $2,000 $1,500 $1,500 $1,000 $1,000 $500 $500 $0 $0 2013 2014 2015 2016 2017 2018 2019 2013 2014 2015 2016 2017 2018 2019 Source: Compilation from Ministry of Civil Service data. Note: Salaries and allowances that are paid from MoEYS’ budget: (1) basic salary is determined by a teacher’s civil service rank. Each teacher is appointed at particular civil service rank in accordance with criteria set out by a royal decree; and (2) teachers also receive a functional allowance which, as the name suggests, is determined by their position and the education level at which they teach. 41 Spending on education includes recurrent and capital spending. The capital expenditures for the education sector were incurred starting from 2015. 42 Ibid. 43 PISA-D defines the minimum level of proficiency as the level at which students are able to tackle tasks that require at least a minimal ability and disposition to think autonomously. 44 Education in Cambodia: Findings from Cambodia’s experience in PISA for Development, MoEYS, 2018. CAMBODIA ECONOMIC UPDATE | MAY 2020 38 Special focus: Teacher Accountability and Student Learning Outcomes The National Student Assessments grade 8 students in all three subjects. For grade 6, conducted by MoEYS revealed that the students slightly improved in mathematics in 2016 performance of students at grade 6 and grade compared to 2013, though their achievement in 8 requires substantial improvement to meet Khmer remained unchanged (table S.1). the expected level in three main subjects: In terms of student performance, the Khmer, mathematics, and physics.45 Overall, percentage of students in grade 8 who are students in grade 6 and grade 8 could only answer proficient in Khmer reading and mathematics around half of the questions correctly during the was low, although the proportion slightly standards tests arranged by MoEYS. This result increased from 2014 to 2017. In Khmer reading, did not improve between 2013 and 2017. The the percentage of students at the proficient level study reflected similar results in terms of scaled increased from 31 percent in 2014 to 34 percent scores, which were centered around mean value in 2017 while, in mathematics, it increased from (500 scaled score). Over the same period, no 10 percent in 2014 to 12 percent in 2017. significant difference in scaled score was seen for Table S.1: On average, a Cambodian student can answer only half of questions correctly Grades 6 8 Years Assessed 2013 2016 2014 2017 Percent Correct 46 52 56 54 Khmer Scaled Score 504 504 500 495 Percent Correct 43 48 44 47 Subjects Mathematics Scaled Score 489 519 500 494 Percent Correct N/A N/A 53 46 Physics Scaled Score N/A N/A 500 497 Source: National Student Assessment, MoEYS Note: Scaled scores were converted with a mean of 500 and standard deviation of 100. N/A = not available. The percentage of students that passed the The NGS model introduced a new type Baccalauréat exams (Bac II) remarkably of institutional setting to ensure high increased from 45 percent in 2014 to 62 accountability mechanisms. NGS was percent in 2016, when the government started established in 2015 as a charter school with implementing rigorously strict exams. The separate management systems from public passing rate of Bac II exams showed further schools. NGS was expanded to cover 11 schools improvement in subsequent years, from 62 in 2019—seven secondary and four primary percent in 2016 to 68 percent in 2019. schools. Students admitted to NGSs were selected through a competitive process, which gives NGS Salary increase is necessary to improve the a head start in quality enhancement in terms of standard of living of teachers but is not student learning outcomes. For example, only 234 a sufficient condition to improve student students out of 1,264 applicants were admitted to learning outcomes. In addition to monetary Preah Sisowath NGS High School in 2019. The incentives, accountability mechanisms along with parents of NGS enrollees can provide monetary other non-monetary incentives can be useful. contribution to NGS schools accredited by the The government has introduced two new school NGS National Board of Directors. To date, four models—New Generation School and School- out of 11 schools that have been accredited can Based Management. Both school models have receive parental contributions. shown improvement in the quality of student learning. 45 The assessment was carried out to assess performance of students in grade 3, grade 6, grade 8, and grade 11 from 2013 to 2017. 39 CAMBODIA ECONOMIC UPDATE | MAY 2020 Special focus: Teacher Accountability and Student Learning Outcomes The SBM model is embedded in the public- were conducted for students from satellite school system and focuses on improving primary schools and all applicants were admitted. accountability via community involvement Parents provided some voluntary in kind or cash and participation. Since 2017, there have been contributions for school operations (table S.2). one hundred lower-secondary SBM schools. Among important features of these two school Unlike NGS, SBM does not prescreen students models are autonomy to manage its own operations, from primary schools, which provides an equal higher (improved) level of school accountability, opportunity for every student to be admitted. use of performance-based management, and Entrance exams at lower secondary schools emphasis on promotion of teacher quality. Table S.2: Characteristics of New Generation School and School-Based Management New Generation School-NGS School Based Management- SBM • Established in 2015, with 11 schools—4 primary • Piloted in 2017, under a Secondary Education schools and 7 secondary schools—were entitled Improvement Project under the NGS program. • Embed in public schools: selected 100 public lower • Three forms of NGS establishment: (i) building secondary schools are required to apply governance a new school (ii) establishing within an existing and accountability systems of SBM. public school but with separate management, and • Admission: No prior screening of students. Tests (iii) contracting schools that lost students to private were conducted at entrance to secondary level for the schools. awareness of student proficiency only. • Admission: Prior screening of students through • Financing: competitive examination. • Government investment in (i) school operations, • Financing: and (ii) teacher capacity upgrade. • Huge proportion of government investment • Parents’ contribution on voluntarily basis. • Private donors Contribution from parents. Four out of 11 schools can accept parental contributions after three years of NGS implementation and having been accredited. Source: NGS policy, NGS operations guide, SBM operations guides, and interview with NGS and SBM schools 4. New Generation School introduced a new to think outside the box. The percentage of level of accountability and autonomy and students passing Bac II exams increased for both quality of education services schools between 2018 and 2019―from 89 percent to 94 percent for Preah Sisowath NGS High a. NGS showed promising student School and from 74 percent to 84 percent for learning outcomes Hun Sen Kampong Cham High School. Over the Five years after its establishment, the NGS has same period, the percentage of students passing shown some results, with two high schools Bac II exams at the national level was flat. The performing at higher standards. Positive proportion of students at both NGS schools results can be seen in two main areas: (i) Bac II having passed Bac II exams was consistently exam outcomes: currently, only Preah Sisowath greater than that of average public schools. The NGS High School and Hun Sen Kampong Cham proportion of students that obtained a grade of A High School have students in grade 12 who were was substantially higher for both schools in 2019 taking the exams; and (ii) critical thinking test compared to the other public schools (figure S.4). results, which measures the level of competency This higher attainment can also be attributed partly CAMBODIA ECONOMIC UPDATE | MAY 2020 40 Special focus: Teacher Accountability and Student Learning Outcomes to the competitive selection process for student The question, then, is why has the effective admission (see also Annex 1 for a summary of governance and accountability systems of advantages, disadvantages, and policy options for NGS made it possible for NGS to raise the moving forward with the New Generation School standards of learning outcomes over time? model). One argument was that since admission First, the governance structure of NGS was to NGS is based on competitive selection, there designed to strengthen the institutional role of the are clear endogeneity issues that do not allow schools, which later ensured the effectiveness of a useful comparison across school models in the services delivered. NGS has set up a National terms of student performance attributed to the Board of Directors with the role of ensuring that program. However, the improvements in student (i) the NGS program performs as required by the performance under the NGS school model after performance matrix agreed upon with MoEYS years of implementation of the key principles and MEF, (ii) the budget is properly used, and listed below clearly indicate its strengths. (iii) quality assurance—a set of accreditation requirements—is strictly enforced for schools to Overall, students at both NGS schools are maintain their NGS title. All schools with an NGS achieving proficiency in terms of critical title had to comply with a rigorous accreditation thinking, with an average mean score between process, which required schools to achieve 24 61 percent and 65 percent in 2019. Critical criteria. The rigorousness of the accreditation thinking tests results showed improvements in process encouraged schools to comply. Achieving the mean scores of both schools from 2016 to accreditation means that NGS schools are eligible 2019. Of the six areas covered in test questions, to receive government funding and are allowed Preah Sisowath NGS High School improved in to receive monetary contributions from parents. four areas, while Hun Sen Kampong Cham High These two factors are important for sustained School improved in five areas. The mean score of school operations. Preah Sisowath NGS High School improved by 7 percent over the period, while the mean score of Second, at the operations level, the NGS Hun Sen Kampong Cham High School improved accountability system strictly requires a high by 26 percent (table S.3). level of performance from school directors, staff, and teachers. This is done through the b. Stricter accountability through a new enforcement of clearly delineated roles and level of institution setting has brought responsibilities of school management, teachers, student learning outcomes to the next and other staff. For teachers, for example, an level Figure S.4: NGS students tend to outperform average public schools in Bac II exams Panel A. Percentage of students that passed Bac II exams Panel B. Percentage of students that passed Bac II exams with a grade of A 2018 2019 10% 2018 2019 95% 9% 8% 85% 7% 6% 75% 5% 4% 65% 3% 2% 55% 1% 45% 0% Grade A-Preah GradeA-HS Grade A-National Preah Sisowath HS Kampong National Average Sisowath NGS Kampong Cham Average NGS Cham NGS NGS Source: MoEYS. 41 CAMBODIA ECONOMIC UPDATE | MAY 2020 Special focus: Teacher Accountability and Student Learning Outcomes  GS students improved in critical thinking tests Table S.3: N (same cohort test grade 7 and grade 10) from 2016 to 2019 Figural Logical Classification Analogies Concept Textual Total Series Sequences Analysis Analysis Mean (Prediction) Score Preah Sisowath NGS Baseline G7 64% 57% 60% 59% 44% 71% 59% Post-test G10 73% 54% 72% 66% 66% 64% 66% Change 9% -3% 12% 7% 22% -7% 7% HS Kampong Cham NGS Baseline G7 50% 56% 46% 14% 30% 13% 35% Post-test G10 74% 49% 73% 69% 66% 33% 61% Change 24% -7% 27% 55% 36% 20% 26% Source: NGS annual report. employment contract is signed on a yearly basis budget, while capacity building accounted for with assigned roles and responsibilities stipulated 13 percent in 2019.46 A salary supplement for under terms of reference. The continuity of this teachers of US$1,800 to US$2,400 per year contract is based on satisfactory performance. encourages teachers to strengthen their teaching Failure to perform as expected means that professionalism by providing full instructional teachers will be transferred back to their original hours and abandon private tutoring for their own (regular public) school. students for extra income. As a result, the learning hours for students increased to 40 hours per week Third, an appraisal system was put in place to compared to only 30 to 35 hours at other public track the performance of all staff, including schools. These additional hours have contributed directors and teachers. At the beginning of the to higher learning outcomes for students. year, Key Performance Indicators (KPIs) are set for each teacher and director, setting out targeted 5. School-Based Management improved achievements. The KPIs help teachers break accountability for community down the achievements into the detailed work a. Student learning outcomes have been required to achieve the targets. This encourages improved despite the inception stage teachers and staff to reach the level of expected of SBM performance. The KPIs set for teachers help them improve behavior, increase effort, focus on Even as a nascent school model in Cambodia, the quality of teaching, participate in professional SBM, known as the community school model, was learning, update their teaching approach, and introduced in 2017 and was piloted in 100 lower develop a professional career, all of which secondary schools. The SBM pilot is showing contribute to improving the quality of student promising preliminary results. The improvement learning over time. of student learning outcomes has been proved, as noted in the progress of students in grades 7, 8, Fourth, transparency and the proper use and 9, the three grades in lower secondary school. of the budget allows NGS to effectively Students in SBM schools showed improvement invest in improving human resources and in their performance in Khmer essays and providing additional financial incentives mathematics, while the number of students who for teachers. For example, teacher and staff score F in both subjects declined (figure S.5). salary supplement in Preah Sisowath NGS High For a summary of advantages, disadvantages, School accounted for 12 percent of total school and policy options for moving forward with the 46 NGS budget. CAMBODIA ECONOMIC UPDATE | MAY 2020 42 Special focus: Teacher Accountability and Student Learning Outcomes School-Based Management model, please see those characteristics and why are they important Annex 1. for improving learning quality? The standard tests applied by SBM schools Regular public schools face three main have motivated students to put more effort challenges: inadequate accountability to the into learning. The changes mean that students community, the lack of an effective school no longer face easy questions during monthly development plan that reflects priorities of tests and now must respond to extensive sets of schools and that supports learning outcomes, questions that cover many areas in the subjects and limited use of performance evaluation. they are required to learn. These practices have Despite some communication between schools contributed to improvements in the results of Bac and their communities, being accountable to II exams in schools where SBM was voluntarily the community is a limited practice. School applied in both the lower and upper secondary management and staff are primarily accountable level. The model not only improves student for responding to the demands within their lines of learning outcomes, but also has spillover effects institutional hierarchy and have little engagement on nearby schools. After seeing the positive with the community. As a result, the education examples of SBM target schools, 186 upper services do not respond directly to the needs secondary schools and 259 primary schools have of the community. While most public schools of their own initiative applied SBM practices.47 develop their plans on an annual basis, these plans do not capture the reality of school priorities, b. Community-held schools are as they tend to focus on the physical structures, accountable for learning outcomes and limited priority is given to improvements SBM schools are community-centric/ in student learning. Performance evaluation in community-owned schools, as the community public schools is limited, despite the existence provides support and ensures that the of a performance evaluation framework. KPIs education services provided by their schools are not widely applied, and with an ineffective are responsive to their needs. This key principle evaluation system in place, directors and teachers dictates the characteristics which, in practice, have a tendency to minimize their efforts. Some make SBM stand out among public schools in do not execute their tasks within school working delivering quality education services. What are hours and, instead turn to opportunities to teach Figure S.5: SBM students improved their performance in Khmer essays and mathematics from 2018 to 2019 Panel A. Student achievement in mathematics at grades 7, 8, Panel B. Student achievement in Khmer essays at grade 7, 8, and 9 and 9 70% 60% 2018 2019 2018 2019 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% A B C D E F A B C D E F Source: SBM assessment in 2019. Note: The grading system classified A as Excellent; B as Very Good; C as Good; D as Satisfactory; E as Limited Achievement; F as Fail. 47 SBM annual assessment. 43 CAMBODIA ECONOMIC UPDATE | MAY 2020 Special focus: Teacher Accountability and Student Learning Outcomes extra classes, provide private tutoring, or teach at influence to request administrative measures for private schools for additional income. nonperforming staff be taken to the relevant and competent national and subnational authorities. Accountability, learning outcomes/teaching quality focus, and the use of performance SBM schools resolve learning outcome issues evaluations are key features of SBM, which by providing additional learning hours for make it distinct from regular public schools. slow learners and introducing standardized School Management Committees (SMCs), elected tests that are strictly conducted on a monthly by the community, play an important role in ensuring basis (like Bac II exams). During the entrance school accountability. The committees represent exams, SBM can identify learners who are behind the interests of the community by holding schools their peers and help them to progress despite accountable for responding to their needs and their relatively low performance. Additional ensuring that schools perform up to the expected learning hours are provided to learners who are standards. School plans, both annual operational and behind. Student weaknesses and strengths are improvement plans, which identify priority actions, communicated to parents so that they may help are required to be approved by the SMC. This students improve their learning at home. In this provides the opportunity for the SMC to demand way, the kind of challenge in which test questions that the school integrate their needs as a priority are prepared during extra classes that teachers and deliver on them. Both three-year and annual offer for a fee and where students who have plans for SBM schools are rigorously developed joined the extra classes could potentially guess the in close consultation with the SMC to ensure that answers is overcome in SBM schools. the school priorities reflect the community’s needs. SBM has improved the effectiveness of SBM plans are developed to respond to school teaching by upgrading the capacity of performance standards, which prioritize student teachers and, where possible, making use of learning outcomes as well as teaching quality, parent contributions to provide incentives for including the adoption of new teaching approaches additional hours of teaching. Some if not all and exposing students to new knowledge, on-the- SBM schools turned to parent contributions to job training for teachers, and school infrastructure provide financial incentives for teachers to teach environment. SBM sets targets for directors, additional hours, which increased learning hours to teachers, and staff on a yearly basis, and KPIs are as high as 40 to 45 hours per week. For example, Bun used for performance assessment. Implementation Rany Hun Sen Koh Dach High School managed of the plans is also closely monitored by the SMC. to raise funds from the community to provide Monitoring and assessment are conducted on an financial incentives for teachers to teach additional annual basis, and schools are held accountable for hours. Teachers from the school received around their performance. US$2,000 a year in addition to their annual salary. Transparency in the school plans, school This differs from practices in various public schools operational activities, and student learning in which instructional hours are reduced due to outcomes create space for community double shift teaching and teachers spending time engagement and demand for improvement, finding additional income informally by teaching particularly in the case of unsatisfactory extra classes and private tutoring. The consistent performance by school staff. As school plans effort to improve teacher capacity and the ability of and student learning outcomes are posted in SBM to provide full instructional hours has made public places as part of transparency processes formal teaching more effective. and operational activities, and as student results Main challenges to improving student are communicated to the community on a learning outcomes in public schools regular basis, the community is well informed. In the case of the unsatisfactory performance of 1. School governance and accountability to school directors or staff, the SMC can exert its the community remained ineffective CAMBODIA ECONOMIC UPDATE | MAY 2020 44 Special focus: Teacher Accountability and Student Learning Outcomes Strengthening good governance and SMC is not enough. The SMC’s mandate needs accountability are important steps toward to represent the voice of the community and improving school effectiveness. Ensuring must be independent from school leadership and effective school governance and accountability management to ensure that schools can respond builds trust with the community, leading to to their needs. Furthermore, the SMC role should greater participation and support. With active be to hold school management accountable for participation from the community, schools will their performance, and this should be strictly have more operational and financial support to enforced. make student learning more effective. b. Promoting transparency of school However, governance and accountability operations at public schools are ineffective (box S.2). As mentioned before, without the transparency Although guidelines on School Support of school operations and information on how Committees (SSCs) were issued in January 2002 school funds were used, one cannot build by the MoEYS to operate and engage with the trust of the community. The priority should be community, implementation at the school level on bringing school transparency to the next level. was superficial. The head of the SSC was not This means that all information related to school elected in many of the schools or was elected with plans, operations, and budgets should be publicly the consent of school directors in some schools. available and communicated on a regular basis Having seen examples of SBM where SMCs to the community. In the case of SBM, publicly formed part of the governance structure, some posting student learning outcomes on a regular public schools have changed their governance basis creates an environment where the issues structure by shifting from an SSC to an SMC. are known and the strategy to address them is SMC’s mandate is to hold school directors and/or laid out, while for NGS, transparency has helped teachers accountable for school results, including schools enhance the effectiveness of meeting the student learning outcomes, while SSC is only expected outcomes that schools had promised. responsible for providing support to school management and communicating with community c. Enhancing quality assurance in the areas of school planning, student affairs, Monitoring procedures are in place at the coordinating with donors. However, in practice, school level to inspect teaching and ensure SMCs established in those schools did not fulfill that students are achieving the expected level their major role, which is to hold school directors for their grade. A mechanism to link inspection and teachers accountable for their performance. with student learning outcomes should be Governance and accountability mechanisms established. Under SBM, the use of standardized should build community trust by fostering tests for students and adequate monitoring of more roles and voices from the community learning based on the test results is of significant in school operations. The following help for schools to track the effectiveness of recommendations can be drawn from SBM and teacher and student performance. NGS experience: d. Strengthening the accountability of a. Empowering School Management district authority Committees District authority can play an important SBM experience shows that having an effective role in enhancing education services at the School Management Committee (SMC) district level, particularly in addressing the helps schools deliver what it promised to the shortage and surplus of teachers. District community. More and more public schools intend Offices of Education (DOEs), in particular, who to integrate an SMC as part of the governance are responsible for overseeing the operations of structure of the school. However, having just an primary and lower secondary schools, have a key 45 CAMBODIA ECONOMIC UPDATE | MAY 2020 Special focus: Teacher Accountability and Student Learning Outcomes Box S.2 Why is school governance and accountability not effective in public schools? The low level of effectiveness of school governance funds. This results in poor teacher discipline and low and accountability in public schools is attributable to teaching effectiveness. four main reasons. 3. Inadequate attention from teachers in fulfilling 1. Ineffective school leadership. Anecdotal evidence their tasks. Although the roles and responsibilities shows that schools with poor leadership have a tendency of teachers were clearly articulated in teacher to have low effectiveness. For example, many school standards, performing the tasks that are required by directors not only poorly managed the school operations the MoEYS was only done to a limited extent. These but tolerated poor practices by teachers, such as arriving ineffective teaching practices were mainly attributable late, unexplained absences, and inconsistent monitoring to inconsistent monitoring of teaching quality at the of teaching effectiveness. Many school directors also national and subnational level and the perception downplayed the roles of the SSC and SMC in holding among teachers of a low salary despite the significant schools accountable for results. increases over the past six years. 2. Inappropriate budget use practices. Sources and 4. Lack of support to improve, despite a willingness. uses of funds are significant to ensure the effectiveness There were some schools that had not performed of school operations. A lack of transparency could well on governance and accountability, yet they had a have two possible effects: (a) conflicts between teachers willingness to do better. These schools faced challenges and school directors over budget spending; and (b) of limited knowledge, resources, and political school directors have no executive power over their capital, and they mostly struggled to engage with the staff, even in instances of the inappropriate use of community on how to improve school operations. Source: Findings of World Bank study, “Accountability, Incentives and Learning Outcomes: Case Study of Selected School Models” (World Bank 2020b). CAMBODIA ECONOMIC UPDATE | MAY 2020 46 Special focus: Teacher Accountability and Student Learning Outcomes role to play. By effectively reallocating teachers quality of education without accountability within the district, it makes for faster and less mechanisms. Teacher performance evaluation is complex administrative procedures and helps in guided by the MoEYS; however, the evaluation is not responding to community needs. In addition, active widely conducted by public schools, as few schools participation of and commitment from district are aware of the evaluation process or forms. In authorities to help address poorly performing addition, the performance evaluation focuses on primary school students who are admitted to making sure teachers follow the teaching protocol lower secondary schools will be critical to overall rather than assessing the quality of teaching to learning outcomes. ensure improved quality of learning. Ineffective performance evaluation and inconsistent quality 2. Teacher incentives are not based on assurance reduce the need for accountability toward performance, and that may lead to quality of teaching and learning. a widening gap in education quality between public and private schools Private schools, while employing teachers from public schools, performed better. The Salary and rank are important tools for the 2017 National Student Assessments showed that government to incentivize civil servants to average students at private schools can correctly perform their duties. Since 2013, the government answer Khmer and mathematics questions twice has tripled civil servant salaries. Allowances such as as often as students at public schools (figure S.6). pedagogic allowances; hardship allowances for those Effective governance, accountability systems, and working in remote areas; allowances for teaching rigorous quality assurance contribute to higher overtime, double shifts, or multiple grades/classes; learning outcomes in private schools, despite and family allowances are provided to teachers. In relatively lower pay per hour for teachers. For addition, teachers are generally promoted to one example, remuneration in two important private higher civil service rank every two years. This has schools in Phnom Penh starts from US$1.90 per not resulted in improved performance. hour for primary school teachers and US$3.50 to Across-the-board salary increases, although US$4.00 per hour for secondary school teachers helpful to raise the standard of living for (figure S.7), while the starting salary in public teachers, were not effective in improving the schools is estimated at US$3.75 per hour for Figure S.6: Students in grade 6 at private schools Figure S.7: Starting per hour salary of private performed better compared with school teachers compared to public students in public schools in 2017 school teachers for primary and (percentage of correct answers) secondary levels Khmer Math $5�00 Parimary Secondary 75 $4�50 $4�00 70 $3�50 65 $3�00 $2�50 60 $2�00 55 $1�50 50 $1�00 $0�50 45 $0�00 Public School Public School Private School Private School Public School (National) (Urban) (National) Source: National Student Assessment, MoEYS. Source: World Bank staff. Note:  The starting salary per hour of private schools is based on interview with two important education groups of Khmer General Knowledge. In practice, private schools tend to offer a starting salary and that increased over time based on teacher performance. 47 CAMBODIA ECONOMIC UPDATE | MAY 2020 Special focus: Teacher Accountability and Student Learning Outcomes primary school teachers and US$4.50 per hour for that schools could potentially create a reasonable secondary school teachers.48 performance system that is acceptable for most, if not all, staff if performance targets are clearly It is likely that the across-the-board salary set, implemented consistently, and monitored increases have made the gap of education fairly and transparently. quality between public and private schools larger. Private schools are now also under b. Enforcing teacher standards pressure to increase their salaries to catch up with NGS and SBM experience shows that the public sector, contributing to the increasing linking incentives and salary increases with cost of education. Within a very competitive performance can be implemented through market, private schools—which make use of strong political support at the national level, teachers who are also teaching at public schools— effective school accountability systems, will need to justify the higher costs, by being and greater school autonomy in operations pushed to increase education quality. First, to management. While it is not easy to introduce compete, private schools build the capacity of performance-based incentives, the cost of not their teachers. Second, they ensure that teacher doing so is likely to be higher. As mentioned, performance is up to their expected standards, salary increases will have limited impact on the and teachers are under pressure to perform better quality of education, and poor learning outcomes at private schools. are likely to continue, at least in the medium Without effective intervention, the quality gap term. It is, therefore, essential to ensure effective is likely to expand in the future. Introducing implementation of performance management for performance-based salary increases, establishing public schools by (i) enforcing teaching standards an effective performance evaluation system, that require teachers to comply with their full-time and implementing teacher career pathways will teaching responsibilities including teaching and maximize the benefit of resources spent on preparation; (ii) removing any conflict of interest; in education and contribute to the improvement of the case of NGS, teachers are not allowed to teach learning effectiveness in public schools. extra classes to their own students for a fee; and (iii) introducing fair and transparent administrative a. Linking salary increase and promotion procedures for underperforming teachers. with performance c. Establishing effective Key Performance Schemes where salary increases are based Indicators (KPIs) on performance seem difficult to implement in government agencies, and particularly in KPIs should not only measure the performance public schools. First, inadequate institutional of individual teachers or staff, but should also capacity to implement performance evaluation cover the performance of both schools and fairly and consistently across the entire sector officials at the national and subnational level is a challenge. Second, there could be potential who are responsible for overseeing school resistance to the implementation of such performance. The one important factor that KPIs a performance-based system. An effective often overlook is student learning outcomes. performance evaluation system would mean that d. Implementing teacher career pathways teachers are required to fully comply with teaching standards. This would also require them to forego As in other careers, in addition to financial any second jobs such as private tutoring, teaching incentives, growing professionally is an at private schools, or teaching extra classes for a important incentive for teachers. Teacher career fee, which affects their ability to receive additional pathways are being prepared under the Teacher sources of income other than their basic salary Policy Action Plan.49 This career mapping, which (see box S.3). NGS and SBM experience suggests needs to clearly articulate core competencies for 48 Effective salary per hour based on interview with two important private schools in Phnom Penh. 49 ESP 2019–2023. CAMBODIA ECONOMIC UPDATE | MAY 2020 48 Special focus: Teacher Accountability and Student Learning Outcomes Box S.3 Evidence on teacher responsiveness to monetary incentives The Talent Transfer Initiative in the United States, an In Indonesia, the Teacher Law of 2005 provides a teacher experiment that offered payments to teachers totaling who has completed the certification process the professional US$20,000 over two years, was designed to encourage allowance of 100 percent of their basic salary. The result highly effective teachers to move from advantaged was much larger budget outlays on salaries, but no increase schools to less-advantaged schools.a The take-up rate for in teacher skills or student learning. By observing the results this program was quite low, with only 5 percent of teachers on PISA from 2003 to 2015, Indonesia will not reach the accepting the offer, but the majority of teachers who did OECD average score in mathematics for another 48 years, transfer to high-poverty schools remained in them while and in reading, for another 73 years. The only achievement they received the extra compensation. reported so far on doubling teacher salaries was a higher level of job satisfaction and a lower percentage of teachers Several other high-quality studies focus on the benefits of with second jobs.b programs designed to improve the retention of specific kinds of teachers in schools serving disadvantaged Similarly, in Pakistan, piloted performance pay incentives students. Clotfelter et al. (2008) analyze a short-lived North had no positive effect on exam scores, and the absence Carolina program that provided a US$1,800 bonus to math, of positive impacts on test scores was probably due to science, and special education teachers serving in high-poverty weaknesses in the program’s incentive structure and/or or low-achieving schools. They estimate that this bonus limitations in the program’s administrative data. The reduced teacher turnover from 30 percent to 25 percent. government piloted performance pay incentives for teachers Cowan and Goldhaber (2015) find similar retention effects in with increases of (i) 13 percent of their yearly basic salary, if an investigation of a program in Washington State that pays they were in a school that increased average exam scores by teachers who hold a National Board for Professional Teaching 10 points (though with no change in enrollment and an exam Standards (NBPTS) credential a US$5,000 supplement for participation rate of 95 percent), (ii) 11 percent if they were teaching in a high-poverty school, on top of US$5,000 for in a school that increased enrollment by 10 percent with no being NBPTS certified. The observed reduction in attrition change in average exam scores and an exam participation rate, implied an elasticity of about 4.3, similar to the estimate in (iii) 10 percent in a school that did not increase average exam Clotfelter et al. (2008). scores or enrollment but increased the exam participation rate to 99 percent, and (iv) 9.4 percent in a school that did not Springer, Swain, and Rodriguez (2016) assess a program change any of the three indicators. Bonus values for head in Tennessee that paid a US$5,000 bonus to highly teachers were double the incentives for teachers. The results rated teachers in low-achieving schools. They find that showed that there was an increase in student enrollment and receipt of the bonus improved retention among teachers in exam participation rates in the second and third year, but no tested grades and subjects, with effect sizes similar to those positive effect on exam scores.c in the previously discussed studies. They also compare the costs of the Tennessee retention bonus to other widely used In Vietnam, cultural norms and government policy were interventions such as summer school and reductions in class crucial to promote and attract competent candidates size, concluding that the Tennessee bonus appears to be a into the teaching profession. Teaching is a low-paid relatively cost-effective way to increase student achievement. profession compared to other jobs requiring similar or even A study by Falch (2010) examines the effect of a wage lower qualifications. An experienced teacher who served premium paid in Norwegian schools with chronic labor for 39 years received around US$439 per month, while new shortages and finds an implied labor supply elasticity of 1.4 teachers were paid less than US$200 per month. Vietnamese in response to this school-targeted pay increase. Importantly, teachers normally voiced their complaints over the low this estimate reflects both the retention of current teachers salary, while the government continued to raise their salary. and success in recruiting new hires, in contrast to previous, However, a strong school-based governance system, teacher higher estimates reflecting only effects on retention. evaluation, and informal professional learning opportunities were reportedly claimed as successful practices to help However, in some developing Asian countries, without teachers perform their tasks professionally.d As a result, strong teacher evaluation, support for professional 15-year-old Vietnamese students performed better than development, and a clear accountability system, average OECD students on the PISA 2015.e incentives do not improve student learning outcomes. Source: Dee and Goldhaber 2017. Note: This box was prepared by Runsinarith Phim and Fata No. a. Glazerman et al. 2013. b. “Learning: To Realize Education’s Promise,” World Bank, Washington, DC, 2018. c. See Barrera-Osorio and Raju 2017. d. McAleavy, Ha, and Fitzpatrick 2018. e. World Bank 2018. 49 CAMBODIA ECONOMIC UPDATE | MAY 2020 Special focus: Teacher Accountability and Student Learning Outcomes steps of career growth, should be coordinated and Improving the quality of staff data in the linked to a capacity building plan. The pathway Human Resource Management Information should consider (i) mapping underperforming System (HRMIS) will help address the surplus teachers for retraining and redeployment to school and shortage of teachers. An improved HRMIS administration career, (ii) preparing action plans provides important information for education for early retirement for underperformed elderly management purpose in general and a tool for teachers, and (iii) promoting high-performance supporting education service continuity planning teachers to grow professionally in teaching career. in crisis situation such as Covid-19 pandemic. Career growth can be usefully linked to salary Although the existing HRMIS was designed to increase. track the demand for teachers in schools, the data in the HRMIS do not reflect the true state 3. Both the surplus and shortage of of demand for teachers53 in schools in a timely teachers negatively affect student manner. In some cases, the data from schools were learning either not submitted or were submitted late. As Effectively deploying teachers can save a result, new teacher recruitment numbers were around 10 percent of the personnel wage bill based on the previous years’ data projections, every year.50 Both the surplus and shortage of and these data were not realistic.54 Steps could be teachers have affected almost every aspect of taken to (i) train Provincial Office of Education education development. It compounds the impact (POE) and District Office of Education (DOE) of ineffective governance and accountability personnel and school directors on staffing level mechanisms on student learning outcomes. norms and approaches for calculating the shortage Shortages of teachers increases class size and and surplus of teachers, (ii) introduce compulsory results in an unreasonable workload for teachers requirements for schools to submit reliable data and makes learning less effective. Some schools to the HRMIS system on time, and (iii) monitor in rural areas have class sizes as big as 60 students data quality through a strict verifying mechanism. per teacher. A surplus of teachers in urban schools b. Improving the transparency of has also resulted in resource inefficiencies because placement of newly recruited teachers teachers will use their free time to seek additional income, teaching extra classes for a fee outside Improving the transparency of newly of school, while at the same time receiving the recruited teacher deployment at the provincial same salary as those who are actively teaching in level will improve the quality of selection at schools.51 There has been an effort over the past entry and appropriate placement. POEs have two years to redeploy teachers from schools with the authority to deploy teachers to schools where surplus staff to schools with a deficit of teachers. teachers are needed the most. In practice, however, Developing career pathways for teachers would the deployment under the POE jurisdiction has complement the effort to redeploy redundant some shortcomings. There have been many cases teachers. However, this issue remains a significant in which newly trained teachers were deployed to challenge as there continues to be a shortage of rural schools and either did not even show up, teachers in rural areas and a surplus of teachers in as the POE only sent their names to the rural urban areas.52 schools, or they showed up but transferred out to an urban school shortly thereafter. The 1996 a. Improving quality of data submission Common Statute of Civil Servants requires that to the HRMIS education staff (teaching or non-teaching) can 50 “Improving effectiveness of public finance,” Cambodia Public Expenditure Review, World Bank, 2019. 51 “Teacher Management and Redeployment: Issues and Practical Way Forward,” MoEYS 2018. 52 See Cambodia Public Expenditure Review, World Bank, 2019. 53 As the process requires, estimating the demand for teachers starts at the school level. Estimates are sent to the District Office of Education (DOE), to the Provincial Office of Education (POE), all the way up to the Department of Personnel of MoEYS. The estimate of the number of teachers needed on a yearly basis is negotiated with the Ministry of Civil Service to set quotas for teacher recruitment. The MoEYS then recruits teachers and trains them at the National Institute of Education and deploys them to schools through the POE and DOE. 54 “Teacher Management and Redeployment: Issues and Practical Way Forward,” MoEYS, 2018. CAMBODIA ECONOMIC UPDATE | MAY 2020 50 Special focus: Teacher Accountability and Student Learning Outcomes only transfer between schools after the completion To provide teachers with the skills they of four years of service. However, in practice, the need to achieve a high quality of teaching, transfer was possible because there is no oversight more investment is needed to improve pre- or monitoring of these decisions. There is no service training and to upgrade the capacity official mechanism to communicate these issues of in-service teachers. The government had to a higher ministerial level, so school directors significantly increased education expenditures, fail to stop the transferring practices. Disclosing with the main focus on increasing salary over the information publicly on teacher placement and last five years. Yet, relatively low investment has transfers with justification is useful to ensure been made to improve the capacity of teachers. proper placement of teachers and to strengthen NGS and SBM experience shows that the accountability. A complaint mechanism could additional investment to build teacher capacity also be established to collect feedback on the can contribute to increased learning outcomes.55 irregularity of teacher placement and transfers. However, the additional investment could have an impact on student learning outcomes provided c. Reallocating teachers from surplus that proper governance and accountability schools to ones with shortages mechanisms are in place. The redeployment scheme where teachers Having high-quality teachers is a prerequisite are transferred from urban to rural areas to ensure that education is of high quality over faces several key challenges. Transfers are the medium and long term. The government carried out on a voluntary basis and there seem has upgraded a teacher training center to a Teacher to be insufficient incentives or inadequate Education College in Battambang province to compelling reasons for teachers to move despite provide four-year training. Additional investment the MoEYS initiative to redeploy teachers. There is also made in the New Generation Pedagogical is a reasonably good standard of living in urban Research Center at the National Institute of areas, including urban infrastructure and health Education in 2019. It is important that entrance services, and teachers have a tendency to settle in exams for Teacher Training Centers continue to urban areas and raise their families there. There be strictly enforced, and candidates are required are also more opportunities for teachers to receive to hold at least a bachelor’s degree to be eligible additional income in urban areas, including to take entrance exams. Training centers should teaching at private schools, teaching extra classes, collaborate to ensure synergy on training topics or home tutoring. and maximize the resources that are available. DOEs and school directors could collaborate Greater effort could also be made to upgrade to transfer teachers within their own the capacity of trainers and trainees at Provincial jurisdictions to balance out the shortage and Teacher Training Centers (PTTC) and Regional surplus of teachers. Surplus teachers at the Teacher Training Centers (RTTC). See table S.4 for primary level could be encouraged to teach at the policy options to improve the quality of education. preschool level to respond to the higher need for It is equally important that the capacity of preschool teachers, with some level of incentives. in-service school directors and teachers is Surplus teachers close to retirement age could be upgraded, given that limited professional considered for early retirement or transitioned to development and in-service training is work as administrative staff. provided to school directors and teachers. As 4. Low level of government investment of 2018, only 27 percent of in-service teachers for professional development of school reported having received professional training.56 directors and teachers 55 NGSs received an additional investment of US$370 per student per year for secondary schools and SBM received US$70 per student per year in addition to a School Improvement Grant (SIG) and a School Operations Budget (SOB) for overall investment in 2019. This estimate is based on investments in SBM operations and capacity upgrade for teachers. 56 Education in Cambodia: Findings from Cambodia experience in PISA for Development, MoYES, 2018. 51 CAMBODIA ECONOMIC UPDATE | MAY 2020 Special focus: Teacher Accountability and Student Learning Outcomes Table S.4. Policy options to improve the quality of education Challenges Short-term policy options Medium-term policy (1 to 2 years) options (More than 3 years) Student learning Introduce new levels of accountability Enforce school effectiveness outcomes remain for the community through (i) standards that require poor, caused largely empowering roles of the School DOE, POE, and school by ineffective school Management Committee to hold management to ensure the accountability to the school management and teachers performance of schools. community. accountable for student learning outcomes, (ii) promoting transparency of school operations, and (iii) enhancing quality assurance at the school level. Strengthen the accountability of district authorities to ensure that schools within their jurisdictions perform at the required level. Capacity building could be provided to the Provincial Office of Education (POE) and the District Office of Education (DOE) to effectively oversee primary and secondary schools. Increasing across-the- Introduce performance-based incentive Implement career pathway board salaries for teachers schemes for school directors, teachers, for teachers. The pathway is of limited impact on and education staff. Salary increase should consider (i) learning outcomes. Yet and promotion should be based on encouraging early retirement doing so is likely to make performance. for underperformed elderly the education quality gap teachers, (ii) mapping Establish effective KPIs to evaluate higher between public underperforming teachers to performance of school directors, and private schools. administrative work, and (iii) teachers, and education staff. promoting high-performing teachers with career growth. Both the surplus and Reallocate teachers from schools with Discourage transfer of shortage of teachers have a surplus of teachers to schools with a teachers by requiring public made student learning shortage of teachers within district and disclosure of teacher transfers less effective, and proper provincial jurisdiction. with justification and allocation of teachers introducing a school feedback would help government mechanism. cut 10 percent of salaries spent on redundant teachers. Underinvestment in Increase government investment for Upgrade capacity of trainers capacity upgrade for professional development coaching and and trainees at Teacher teachers seems to prolong in-service training for teachers. Training Centers. low quality of learning in the medium term. CAMBODIA ECONOMIC UPDATE | MAY 2020 52 Conclusion Conclusion Government efforts to reform the education sector over the last two decades have achieved some success and lessons learned to further improve the sector. Experiences from NGS and SBM suggested that quality of education could be improved by focusing on the followings: First, strengthening accountability in public schools. Accountability is a prerequisite for improving the quality of student learning. In public schools, accountability is yet to be effective. While it is not easy to strengthen the accountability mechanisms in public schools, NGS and SBM experience shows that it can be done by strictly enforcing institutional guidelines, allowing a reasonable level of school autonomy in operational management, and active community engagement in school operations. Accountability at school level is also critical for the government to effectively implement its policy reforms efforts to respond to the impacts of Covid 19 pandemic. Faster adoption of accountability mechanism at school level for implementing the existing and additional reform initiatives to address the challenges is beneficial. Second, linking salary increase and promotion to performance. It is imperative that incentives schemes for teachers and education staff are based on performance. Credible salary increases help provide incentives to teachers and ensure an acceptable standard of living while carrying out their duties. However, increasing salaries across the board without a mechanism to ensure satisfactory performance may not be effective. The gap in education quality between public and private schools is likely to continue to widen. Introducing performance-based incentives for teachers strengthens public schools to effectively execute their functions and this will also be very important in post-Covid-19 recovery effort. Third, strengthening capacity and quality of teachers. Because the government relies on teachers to deliver education services, ineffective pre-service and in-service training impacts the quality of education in the long term. Some improvement has been made by strengthening the requirements to enroll at the Provincial Teacher Training Center and Regional Teacher Training Center. In addition, continuing to strengthen the professional practice of in-service teachers will help improve the quality of teaching in general. Specifically, teachers should be trained and prepared for supporting slow learners. This will help to reduce the impact of learning loss from school closure during the Covid-19 pandemic and beyond. Two additional initiatives could be useful in addressing Covid-19’s impact on education quality: • Initiatives to reduce drop out rate by supporting slow learners as a result of learning loss. With students not able to catch up, drop-out rate is likely to increase in the medium term. An initiative to support students who are lagged behind will help students to compensate learning loss during the school closure. • Rigorous monitoring mechanism to track the effectiveness of school’s response in post Covid-19 recovery effort. Student learning outcomes should be an important measure as a part of the monitoring framework. This could be backed by the continuation of student assessment to provide the status of student learning outcomes as measurement of progress. Education reforms have a long-term horizon. It takes government investment, time, and perseverance to implement education reforms to yield positive results. However, the grim truth is that poor accountability in public schools magnifies Cambodia’s long-standing low-quality learning, which the reforms aim to address. More active community engagement can help address this underlying accountability issue and enable education reforms to progress more smoothly and deliver the quality education services most needed by the community. 53 CAMBODIA ECONOMIC UPDATE | MAY 2020 Advantages, disadvantages, and policy options for each Annex 1:  school model New General School (NGS) Model Advantages Disadvantages Policy options • Effective institutional setting. National Board of Directors, • Selected only qualified • Continue to focus on quality of Provincial Board of Directors, and School Support Committee to students. Only students learning and gradually scale-up. ensure quality. passed the entrance tests are It takes time to build trust with • Effective appraisal system. All staff/teachers perform their duties admitted to NGS schools. parents (only 4 out of 11 NGSs effectively with the introduction of KPIs. • Relatively high government can accept parent contributions, • Professional teachers. Continuous trainings and professional investment required. important sources of revenue to development. ICT tools were also provided for quality teaching. Investment cost per student cover operations costs on top of • More trusted by parents. Rising demand. Entrance exam at Preah for secondary school reached government investment). Sisowath High school, for example, received 1,264 applicants US$ 370 per year. • Gradually increase parent for 234 available spaces. Parent annual contribution US$280 per • Scaling up NGS operations contributions. Once the value is student (2019). requires high government consistently assured for students • High standards of learning including ICT, inquiry-based investment. over time, parents’ willingness to learning. pay will follow. • Small class size. 35 students per teacher as part of quality • Strengthen knowledge assurance process. management. The operations • Incentives for teachers. Salary supplement, plus incentives for fully taken on by MoEYS beyond leading learning club. advisory services, it will ensure • Teacher capacity building. Scholarship to teachers who co-pay operational sustainability, which 30% of tuition fees; study visits to other schools in the region. requires effective management. CAMBODIA ECONOMIC UPDATE | MAY 2020 Annex 1: Advantages, disadvantages, and policy options for each school model 54 55 School Based Management (SBM) Model Advantages Disadvantages Policy options • Provides equal opportunity for students to enroll. Poor-performing students • Insufficient teachers. • Increase teachers’ professional from satellite primary schools (20% at basics in reading and mathematics) are Teacher shortage in learning. also admitted and additional teaching hours provided to support slow learners. SBM schools due to • Allocate teachers from surplus • Accountability for community. School Management Committee in effective transfer schools to ones with shortages. representing community to demand better learnings (exam results and deployment of DOEs and POEs could work regularly posted at public places). teachers. together with schools within their • Lower government investment. Average annual government investment • Low professional own jurisdictions. US$70 per student in 2019. learning for teachers. • Collaborate with DOE, • Improved learning outcomes. Students who passed the standard tests for Despite teacher POE and primary schools to mathematics increased from 56% in 2018 to 69% in 2019 and for Khmer capacity upgraded, address slow learners. SBM, CAMBODIA ECONOMIC UPDATE | MAY 2020 essay from 49% in 2018 to 53% in 2019. Additional hours of teaching for slow level of professional in collaboration with DOE and learners. development for POE, could develop program to Annex 1: Advantages, disadvantages, and policy options for each school model • Strict standard tests. Strict standard tests to strengthen student learning. teachers need to be support satellite primary schools • Upgrading teacher capacity. Scholarship for teachers to study at Royal provided. to improve student learning University of Phnom Penh (full tuition fees and travel allowance). outcomes. Private School Model Advantages Disadvantages Policy options • A well-structured education group. Many private schools • Raising costs of education. This is • Consider limiting private structured as education groups with headquarters to catch up with market when salary of schools from employing overseeing their operations of branch schools. public schools teachers increased, private teachers from public school. • Selected teachers and appraisal system in place. Demand- schools tends to increase salary to be on Teachers working at private driven. KPIs are in place to evaluate teacher performance. par with market. schools should be encouraged to • Low student-teacher ratio. 25 to 30 students per teacher in • Rely on teachers from public schools. work fulltime, rather than part- classroom. Most of teachers in private schools work time. • Rely on their own quality assurance unit. Most private part-time, while also working for public • In the long-term, big private schools have their own quality assurance unit, rather than schools. This affects teaching quality of schools should be encouraged depending on public quality assurance services. public schools. to establish their own teacher • Capacity building for teachers. Continuous capacity • Tuition fees. Private schools charge training center. At present, building for teachers. tuition fees from US$500 to US$1500 per all the teachers were trained by year per students, depending on school. PTTC or RTTC. Annex 2: Cambodia’s key indicators under the baseline scenario Annex 2: Cambodia’s key indicators under the baseline scenario   2017 2018 2019e 2020p 2021f 2022f Output and Economic Growth Real GDP growth, at constant market prices 7.0 7.5 7.1 -1.0 6.0 6.3 (y/y, percent change) Private Consumption 3.7 3.0 7.0 2.1 5.0 5.4 Government Consumption 23.5 5.1 -9.1 6.7 -16.7 10.8 Gross Fixed Capital Investment 6.1 6.1 10.7 4.8 13.2 7.4 Exports, Goods and Services 5.3 5.3 7.8 -16.0 7.0 7.5 Imports, Goods and Services 4.1 4.1 6.0 -11.0 6.9 7.1 Real GDP growth, at constant factor prices 6.8 7.4 6.8 -1.0 6.0 6.3 (y/y, percent change) Agriculture 1.7 1.1 -0.5 0.3 0.4 0.5 Industry 9.7 11.6 11.3 -1.0 9.2 9.3 Services 7.0 6.8 6.2 -1.7 5.8 5.8 Money and Prices GDP deflator (annual %, period average) 3.3 3.1 2.7 1.6 2.6 2.4 Broad money (% of GDP) 88.2 100.7 95.2 109.5 123.7 139.8 Domestic bank credit to private sector (% of GDP) 86.7 99.6 83.4 91.8 102.3 113.6 Nominal Exchange Rate (local currency per USD) 4,062 4,067 4,070 4,081 4,014 4,054 Nominal Effective Exchange Rate (2015=100) -0.1 -0.7 1.8 0.5 2.2 -0.5 Real Effective Exchange Rate (2015=100) 1.3 -3.3 0.9 -2.4 1.0 -2.4 Short-term interest rate (% p.a.) 11.7 9.7 8.0 7.8 7.0 6.8 Fiscal Revenue and grants (% of GDP) 21.9 23.8 25.4 16.6 17.3 20.2 Expenditure and net lending (% of GDP) 22.7 23.4 24.9 25.6 25.0 24.7 Overall balance (% of GDP) -0.8 0.4 0.5 -9.0 -7.6 -4.5 Primary Balance (% of GDP) -0.4 0.8 0.9 -8.5 -7.1 -4.0 General Government Debt (% of GDP) 30.3 30.0 29.0 31.6 33.4 35.3 External Accounts Exports, GNFS (nominal US$, annual %) 9.4 12.3 9.5 -15.1 10.6 8.4 Imports, GNFS (nominal US$, annual %) 7.8 9.3 9.0 -10.3 10.0 7.4 Current account balance (current US$ millions) -9.7 -8.9 -8.8 -14.2 -13.7 -13.5 Foreign Direct Investment, net inflows 2,673.1 3,088.8 2,845.1 2,328.1 2,764.3 3,087.1 (current US$ millions) Gross international reserves (US$ million) 12,168.7 14,597.8 18,732.8 16,859.5 17,702.5 19,118.7 (prospective months of imports of g&s) 7.5 6.3 7.6 6.9 6.8 6.8 Memo: Nominal GDP (US$ million) 22,115 24,476 26,888 26,969 29,806 32,120 GDP per capita (US$, nominal) 1,376.1 1,500.5 1,624.6 1,606.8 1,751.9 1,863.4 GNI per capita, Atlas method (current US$) 1,240.0 1,390.0 Sources: Cambodian authorities, IMF, and World Bank staff estimates and projections Note: e = estimates, f = forecast, p = projection 1/ Goods and Non-Factor Services (GNFS) CAMBODIA ECONOMIC UPDATE | MAY 2020 56 Bibliography Bibliography Barrera-Osorio, F., and D. 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