“The global epidemiological and economic crisis unleashed by COVID-19 poses the greatest threat to Cambodia’s development in its 30 years of modern history.” This is how a World Bank study on the Cambodian economy published on May 29, 2020 begins. In September, the World Bank predicted a concrete decline in gross domestic product of 2.0 in the current year, which is the worst value since 1994. This could increase the proportion of people living below the poverty rate by 3 to 11 percentage points. Quite a few private households could suffer a 50 percent drop in income in 2020.

According to Extrareference.com, Cambodia’s economic boom over the past few decades can be traced back directly to globalization. But the foreseeable collapse in world trade and intercontinental travel activities threaten to hit the country to the core, as hundreds of thousands of jobs are suddenly threatened. Above all in the tourism industry, which suffered from an atypical doldrums in autumn 2019 and has to cope with a 74 percent decline in international visitors in the first nine months of 2020. At the moment, it is unlikely that things will go significantly better in 2021, even if global mass vaccination occurs.

Similar catastrophic conditions are developing in the textile industry. The first signs were felt in February when fewer raw materials were being shipped from China to Cambodia. On August 12, the European Union announced in February that the partial suspension of trade privileges under “Everything But Arms” came into effect and will also affect the industry in the long term. And now many textile labels are canceling their orders because they can barely sell anything themselves. By the middle of the year there were already 150,000 of around 700,000 seamstresses lost their jobs, at least temporarily. However, since almost all factories are foreign owned, in view of the reduced trade preferences, some of them might not reopen at all.

The consequences of this are far-reaching: With their income, the vast majority of seamstresses support their families in rural Cambodia, who urgently need this money. In Cambodia, too, there is now short-time work benefits in the textile industry with 60% of the minimum wage, which is currently 190 US dollars. And what will the seamstresses do? In the past, domestic agriculture was used again in such situations, but the need for labor is currently not nearly so high that it is relevant. The only option is to work abroad, especially in Thailand. But that too is over, the borders are closed except for goods traffic, also for commuters.

The living conditions of many Cambodians have already deteriorated considerably: 96% of people are said to be affected by less work, almost 40% by business tasks and 45% by increasing debt. Now it will take revenge for the fact that private debt has risen dramatically in recent years. With the registered banks and microfinance institutions alone, the private outstanding amounts add up to 10 billion US dollars. The crisis will mean that fewer and fewer people will be able to service their loans. Land titles were often deposited with financial institutions as collateral. Without political intervention, primarily by facilitating personal bankruptcies, an unprecedented threat looms the impoverishment of millions of Cambodians with a debt that they can no longer pay in their lifetime.

Cambodia Economy

After all, the government is providing up to 2 billion US dollars to combat the crisis, but it is still far from foreseeable whether this amount will be enough. In June, the government announced that it would introduce temporary welfare payments that would benefit more than 600,000 disadvantaged households. A total of 25 million US dollars are to be made available monthly for this purpose. There are no other social security mechanisms. In addition, the already low government quota leaves little room for fiscal policy, for example for sales tax cuts.

From a market economy perspective, Cambodia itself has no control over when the crisis will end – the key to this lies elsewhere:

  1. Only when the demand for clothing in the traditional industrialized countries increases again, both in digital and in stationary retail, will global trade pick up again. Before that, the clothing industry will not produce nearly as much as it did before the crisis.
  2. Even if many countries reopen their borders without quarantine conditions and international air traffic should soon recover: Tourists will only come to Cambodia again in relevant numbers when the strict entry regulations are relaxed and they are safe again to be able to return to their homeland without any problems. And when – especially in western countries – they can afford long-distance travel again.
  3. Cambodian families who have family members abroad will not receive their usual financial support until the crisis in these countries has subsided. In the USA in particular, some people who have families and relatives in Cambodia have become unemployed.

Only under these conditions will domestic demand rise again and the modest prosperity be more or less evenly distributed across the country. (As of November 30, 2020)

Covid-19 and Cambodia Economy
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