Cambodian Prime Minister Hun Sen wears a face mask at Phnom Penh International Airport, May 11, 2020. Photo: Tang Chhin Sothy

While governments worldwide spend extravagantly to buffer their economies from the Covid-19 pandemic’s ill-impacts, Cambodia is instead tightening its belt.

Last week, Phnom Penh surprised observers by announcing it would slash next year’s state budget by around 50%, notably at a time regional neighbors like Thailand and Singapore are rolling out richly-financed rescue programs. 

Specifics of the austerity cuts are still being devised, but it appears provisionally that officials will bring expenditures down to around US$4 billion in 2021, a massive reduction from the $8.2 billion earmarked for 2020.

Under current plans, social affairs programs will decline by 11.3% next year. By comparison, there will only be a 4.3% cut for defense, one of the lowest reductions across the board, according to media reports. 

A wage freeze will be placed on civil servants and other public-sector workers, while there will also be no new civil service hiring apart from replacing those who retire.

There will also be cuts in discretionary spending, such as the twice-annual $12.50 bonus for each civil servant for the Khmer New Year and Pchum Ben Festival holidays.    

The budget cuts come against the backdrop of an expected economic collapse. Last week the government predicted a 1.9% economic contraction this year and a V-shaped rebound of 3.5% in 2021.

The 1.9% contraction projection – potentially the lowest growth level since peace returned to the country in the early 1990s – is likely an honest assessment. 

People buy fruit at an early morning produce market in Phnom Penh on June 12, 2020. (Photo by TANG CHHIN Sothy / AFP)

The latest World Bank estimates suggest Cambodia’s economy will shrink by between 1%-2.9% in 2020, although the worst-case percentage worsens every time the Bank issues a new forecast.

The World Bank’s Cambodia in the Time of Covid-19 report, released last month, stated in a press release that the pandemic “Poses Greatest Threat to Cambodia’s Development in 30 Years.”

The report estimated that unemployment has soared to almost 20% and that poverty levels could climb by 11 percentage points if income losses last for six months.

Still, the Cambodian government has in may aspects done well in handling the pandemic. The country has not counted any deaths from Covid-19 and only has 128 confirmed cases; no new cases were recorded for almost six weeks until June 14.

But its stimulus measures and promised cash-handouts have been implemented in ad hoc and convoluted ways, which is perhaps understandable given the gravity of the situation and the country’s notably hidebound bureaucracy.

In mid-May, the Cambodia Labor Confederation told the Phnom Penh Post that just 15,000 of 150,000 suspended garment workers have received their monthly $40 payment from the state since the beginning of the month. 

Initially, Prime Minister Hun Sen promised the amount would be higher, before realizing the scale of the problem. 

Cambodia’s Prime Minister Hun Sen (L) walks during his visit to the Cambodian People’s Party (CPP) headquarters in Phnom Penh, June 5, 2020. Photo: AFP/Tang Chhin Sothy

In February, the government said it had between $800 million and $2 billion set aside in fiscal reserves for stimulus measures, including relief for expected revenue losses, payments for laid-off workers and other subsidies, like a new pledge to cover parts of electricity bills for certain companies.

There is widespread skepticism, however, about the government’s accounting. For one, several analysts doubt that the government actually has $2 billion in reserves. Others question if the reserves are as readily available to spend as Hun Sen had claimed back in February.

It also remains unclear whether the $2 billion is factored into this year’s revised budget or next year’s planned austerity budget, and whether it is derived from only financial reserves, as Hun Sen said in February, or from other sources.   

Apart from next year’s austerity budget, Phnom Penh is also trimming this year’s expenditure, which in December was set at $8.2 billion. In April, the government said it will cut spending on goods and services this year by $918 million, on top of other belt-tightening.

Under the initial plan, outlined at the end of last year, the government expected to collect $6.5 billion in revenue in 2020, up almost 20% from last year. 

This would have conceivably come mainly through taxation and customs. The remaining $1.7 billion would come from loans from development partners, namely China, or financial reserves.

But Kong Vibol, director-general of the General Department of Taxation (GDT), cautioned at the beginning of March that an expected 20% hike in tax collection this year expected to raise around $2.8 billion was unlikely.

Months later, and with an all but certain major economic contraction this year, it is difficult to imagine the GDT even being able to collect as much last year’s $2.2 billion. 

An Acleda Bank employee counts US currency inside the bank in Phnom Penh on May 25, 2020. Photo: AFP/Tang Chhin Sothy

“It is highly likely that revenue collection in 2020 will be significantly below the budget target,” the World Bank stated in a report last month. Some observers now speculate the figure might be as little a half the initial target.

Tax holidays have been offered to companies in the tourism sector including airlines until July, while firms in other sectors are also getting a reprieve. A 4% stamp tax on residential properties has been suspended until next January.

Recent reports suggest that at least 130,000 workers have lost their jobs in the apparel manufacturing sector, which accounts for roughly an eighth of the entire workforce. Thousands of businesses across all sectors have collapsed, and therefore won’t be paying taxes.

As a result, the fiscal deficit is expected to rise to 9% of GDP this year, compared to a fiscal surplus of 0.5% last year, according to the World Bank.

Moreover, there is the possibility that $4 billion or so of next year’s austerity budget will have to be revised downwards later in the year if the economy doesn’t pick up as expected.

If a vaccine against Covid-19 isn’t produced by the end of the year, it’s difficult to see Cambodia even reaching the government’s forecast of 3.5% growth next year, Hong Vanak, an economic researcher at the Royal Academy of Cambodia, recently told the Phnom Penh Post.  

Meanwhile, a blog post this week, “Facing the crisis: the role of tax in dealing with Covid-19” by analysts at the IMF, UN and other agencies, noted that after the 2008 global financial crisis it took developing countries on average eight years for revenues to recover to their pre-crisis level.

All of this arguably couldn’t have come at a worse time for Phnom Penh. State budgets rose considerably in recent years, from around $3 billion in 2013 to $6.7 billion last year. Until now, tax revenues have increased apace.

An employee checks the temperature of a man before he enters a bank in Phnom Penh on March 17, 2020. Photo: AFP/Tang Chhin Sothy

General Department of Taxation collections grew by 28% last year compared to 2018. With the additional $2.3 billion taken by the General Department of Customs and Excise, overall tax collection was a third higher than the government projected.

But deep structural issues remain and will only be worsened by the pandemic.

This year, an expected $2.1 billion of the government’s $8.2 billion budget will go to pay the salaries of government officials, a much higher percentage than in countries at a similar level of economic development as Cambodia.

As the World Bank noted in its public expenditure review last year, Cambodia actually has comparatively few civil servants, especially in healthcare and education, yet the ratio of wages to GDP per capita is much higher than in most comparable countries.

More worrying is the country’s declining “fiscal space”, the money the government has left to spend after making it’s allocated and mandated payments such as public-sector wages, social security contributions and loan repayments.

Under the worst-case scenario the World Bank forecasted last year – which is now likely far from the worst-case scenario in view of the global pandemic – the Cambodian government’s “fiscal space” will fall from 55% of GDP in 2016 to just 28% in 2023.

In other words, soon less than a third of the state budget will be available for investment and new social programs, arguably at a time when the country will need them most.