The United Nations Development
Programme (UNDP) launched Cambodia’s first development finance assessment (DFA)
report at a virtual event held on 16 July 2021. The event was presided by H.E.
Ros Seilava, Secretary of State, Ministry of Economy and Finance (MEF), and was
attended by 64 participants representing the MEF and other line ministries, UN
agencies, development partners, businesses, research institutes and civil
The publication of Cambodia’s DFA
follows the launch
in April 2021 of the country's integrated national financing framework (INFF) development
process. The DFA looks specifically at the various financial resources
available to support development in the country – from public budgets, the
international community, private investors and remittances.
The findings, projections and
recommendations of the DFA provide important inputs for the INFF process and the
development of a financing strategy that will inform decision-making for the
allocation and sourcing of funds to reach Cambodia’s Sustainable Development
Goals (SDGs) and national development priorities.
Exploring new ways to fund recovery and get the country back on the
Like most countries, the pandemic triggered setbacks in Cambodia. The economy
contracted by 3.1 per cent in 2020. Losses in financing flows totalled
US$3.6 billion in 2020 (Figure 1).
The most severely impacted financial sources were domestic revenue, foreign
direct investment (FDI) and private domestic investment.
Cambodia developed a post-Covid economic recovery plan for 2021-2023 to
chart a path for sustainable and inclusive recovery based on three strategic
directions: economic recovery, reforms and building resilience. To achieve this
ambition, a corresponding investment plan is crucial.
“Going forward, it's very difficult in terms of what to prioritise,” said
H.E. Serey Chea, Assistant Governor and Director-General of Central
Banking at the National Bank of Cambodia. She cautioned that the country is
experiencing considerable pressure on its spending. “If the government has to tackle all these challenges at the same time,
we will need different sources of funding.”
The DFA is therefore timely. "This report is particularly relevant considering
the implementation of economic and social measures by the Royal Government of
Cambodia to respond to Covid-19,“ said H.E. Seilava. The government’s
three-year post-COVID economic recovery plan will be launched soon and is
primarily funded by public resources, but the plan will also explore other possible
financing sources. “I am hoping this report will provide insights on the
different financing options available,” continued H.E. Seilava.
Figure 1: Past and projected financing flows and the impact of Covid-19
Looking beyond LDC
Decades of peace, high economic growth and macroeconomy stability created
a strong foundation for the Royal Government of Cambodia to respond effectively
to the crisis. This period of growth has
also set the country on a path to graduate from Least Developed Country (LDC)
status. In 2021, the country met the
minimum threshold for graduation for the first time.
As Cambodia moves towards middle-income country status,
the composition of the country’s financing landscape is expected to shift. Official
development assistance (ODA) in the form of concessional loans or grants will further
decrease. But ODA isn’t the only main financing source available
to support Cambodia’s development.
“Some forms of
finance, such as grant-funded ODA, have fallen dramatically. Other flows, such
as domestic resources, remittances and Foreign Direct Investment (FDI), are
expected to continue increasing,” said the outgoing UNDP Resident Representative Nick Beresford. “Once we are able to ease Covid-19 restrictions, we
can expect a strong growth in development finance flows.”
According to the DFA, financing to support
development is likely to double to US$23.4 billion, accounting for 69.8 per
cent of GDP by 2025. Within those flows, domestic sources and remittances are
becoming increasingly important. Domestic financing sources, including public
domestic revenue and private domestic investment, have grown quickly over the
past 20 years. Much of this growth has been thanks to significant improvements
in tax collection (Cambodia is the best performer in the region) and the
successful implementation of Cambodia’s resource mobilisation strategy (Figure
While the DFA report presented a positive outlook
for Cambodia’s future financing landscape, there was a strong consensus among
panellists that resting on improvements in tax collection was not enough. Domestic
revenue relies mainly on tax revenue (about 85% of total revenue and 20% of
GDP). Despite improved tax revenue collection in the past,
it is critical to diversify the financing landscape through innovative
financing tools and mechanisms to finance development priorities set out in the
National Strategic Development Plan 2019-2023 and to accelerate the achievement
of Cambodia’s Sustainable Development Goals.
“We should not go back to business as usual,” said Ms Kristin Parco acting as UN Resident Coordinator ad interim, explaining that a
new generation of national development plans will require robust financing
report makes clear that the time to prepare new sources of financing is now.”
Figure 2: Consistent reforms in tax policy and administration over two decades have yielded positive results. Domestic tax revenue increased from 10.0 per cent of GDP in 2010 to 19.7 per cent in 2019. This makes Cambodia among the best performers in the ASEAN region.
Towards a more holistic
way of thinking about finance
At the launch event, the principal
author Dr Phim Runsinarith, UNDP National Macroeconomic Expert, outlined several recommendations that emerged
from the DFA, building on reforms that the government is already taking forward.
In his presentation, Dr Runsinarith explained that these recommendations represent a more holistic
approach for thinking about financing, looking at the opportunities that exist
across all public and private sources of international and domestic financing.
This holistic lens is a hallmark of the INFF approach.
Recommendations made to increase domestic resource mobilisation include
improving the business environment, strengthening tax collection measures and implementing
sin or public health taxes on the consumption of tobacco and alcohol, and on
activities such as gambling.
Dr Runsinarith also underscored
the importance of issuing domestic lending instruments in Cambodia’s domestic
currency, as opposed to dollar denominations. H.E. Serey Chea outlined the current work being done to develop a national
securities market and the efforts invested by the National Bank of Cambodia to
convince corporations to issue bonds in local currency.
Figure 3: Over 60 participants from government ministries and development partner agencies attended the DFA launch event.
Harnessing the power of the private sector for
sector investment, which includes both domestic private investment and FDI, has
so far narrowly focused on a few sectors, such as the garment industry, tourism, and
real estate. One of the key themes of the panel discussion was the need to
incentivise private sector investment, particularly, in productive sectors that
contribute towards Cambodia’s national development goals – with particular
emphasis on stimulating the green economy.
DFA includes recommendations for boosting the level of FDI and private domestic
investment via credit guarantees to firms and considering the reinvestment of
tax concession. But the panel was in complete agreement – it’s not enough to
restore and maximise private investment, Cambodia must also focus on improving
the FDI quality. There is a need to encourage FDI to diversify beyond
traditional investment spaces into productive sectors that would help the
country achieve its long-term development objectives.
The global financial system is already experiencing
a big shift toward impact and Environmental, Social and Governance (ESG) investment.
According to the Global Impact Investing Network, as of the end of 2019, over
1,720 organizations manage US$715 billion in impact investing assets globally.
A recent OECD report estimates the amount of professionally-managed portfolios that
have integrated elements of ESG assessments exceeds
US$17.5 trillion. The growth of ESG-related traded investment products
available to institutional and retail investors exceeds US$1 trillion. This is
a good indication of the shift in the global financing landscape and
priorities. All panellists agreed that Cambodia must adapt to this changing environment
and seize such sustainable financing opportunities.
Support from the government – and some innovative thinking – is crucial to making this happen.
The DFA report outlines several recommendations that can help steer private
sector investment in new directions.
partnerships and blended financing arrangements can draw private sector
financing to under-funded sectors. H.E. Serey Chea underscored the fact
that blended finance is already gaining traction in Cambodia. “As we emerge
from COVID-19, we see the private sector more sustainably minded. But we need
to make sure these funds go towards strategic investments to the benefit of the
country,” said H.E. Serey Chea.
Mr Beresford added that green and
climate change bonds can equally expand financing sources. Issuers would fund projects
that have positive environmental or climate benefits, such as renewable energy
or green and circular economy projects.
Dr Chheang Vannarith, President of the
independent think tank Asian Vision Institute, underscored the importance of
boosting private investors’ confidence in the legal and regulatory system.
“Investors should not doubt our regulatory system and wonder if their
investments are safe.” The panellists noted that Cambodia’s
new investment law, expected to come into force later this year, may be the
catalyst needed to attract investors to new sectors.
Figure 4: FDI investments in Cambodia are mainly concentrated in a few subsectors: garments, tourism, and real estate. In 2019, the construction and real estate sector received the largest share of 51 per cent of total approved FDI.
Next on the agenda: shifting mindsets
In the short run, the DFA provides an analysis of how the socio-economic impacts of the pandemic have shifted the
financing landscape. This can help the Royal Government of Cambodia to deploy
policy responses that account for the varied effects across public and private
finance. Maintaining an understanding of how these trends evolve over time will
be important for an effective policy response as the country navigates the
recovery period and moves forward with the development and implementation of
its national financing strategy. The INFF process is just as much about policy
reforms, incentives, and regulations, as it is about changing the way government
and other national stakeholders think about investing for the future.
Throughout the discussion, the
panellists continued to come back to one question: How can we change the
mindset of Cambodian investors?
“We can talk about sustainable
financing, about green financing. We can have all the rules and evidence in
place, but if people don’t believe in it, then the implementation will not
happen,” said H.E. Serey Chea.
Radhika Lal, UNDP SDG Finance
Policy Advisor, echoed this sentiment, “Once a change in mindset is made,
you’ll start to get investors who are willing to be there for the long-term,
who are willing to diversify.”
Some of the work in shifting
mindsets, developing capacity and sharing knowledge across sectors has already started.
H.E. Serey Chea pointed to the example of the recent memorandum of
understanding between the National Bank of Cambodia, the Association of Banks
in Cambodia, and the Ministry of Environment in this respect. “This has been a
good start in setting the stage for understanding each other’s goals and
working together from there,” said H.E. Serey Chea.
In many ways, the pandemic has opened
the door to new forms of collaboration and new ways of thinking. H.E. Serey Chea has already noticed a change in Cambodia. “What I see standing out during this
period of COVID-19 is a mentality shift. People are more aware of their
surroundings. People are starting to
appreciate the green environment around them.” She hopes that with this mindset shift
– and the right financing framework in place - investments will follow.