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Sovereign bonds needed as Cambodia forecast to graduate from LDC status by 2028: UNDP

Cambodia is forecast to graduate from its Least Developed Country (LDC) status in either 2027 or 2028, according to report published by the UN Development Programme (UNDP). In response, the international development organization have recommended an expansion of domestic lending instruments detailing specifically a sovereign bond issuance in Khmer riels.

Despite its lower-middle-income status, Cambodia will likely continue to be classified as an LDC until 2027- 2028. This may result in Official Development Assistance (ODA) declining but will continue to be a resource for the medium term as well as a catalyst for other sources of development finance, the Cambodia Development Finance Assessment report found.

LDC status offers preferential and highly beneficial trade privileges. Continued access to concessional development finance can help consolidate recent advances and address current and emerging development challenges and opportunities.

The UNDP said Cambodia can expect to graduate from Least-Developed-Country status towards the end of the 2020s. The time to prepare new sources of financing is now, as this report makes clear. For example, being able to issue bonds in Khmer riels, is an option being considered and one strongly supported by UNDP.

Sovereign bonds in conjunction with a push to de-dollarize the Cambodian economy is a stated agenda of the National Bank of Cambodia and the Cambodian government. In September last year a draft law was issued allowing government bonds to be listed for the first time on the Cambodia Securities Exchange (CSX).

However, investors have pushed back against the plans to de-dollarize stating Cambodia’s highly dollarized economy is a major selling point to promote Foreign Direct Investment (FDI). Adding, it is a safe guard against a potential currency crisis such as drastic devaluation in currency matched by volatile markets and a lack of faith in the nation’s economy.

In response Resident Representative of UNDP Cambodia Nick Beresford questioned that sentiment and told Cambodia Investment Review a highly dollarized economy might be good for some investors, but is it always good for Cambodian people?

“Dollarization carries a price for Cambodia to pay in terms of seigniorage and monetary policy. First, by using a foreign currency, a country cannot print its own money, and so a major policy tool is missing. Second, due to dollarization, the Cambodian government cannot pursue monetary policies freely,” Beresford said.

“The increase and the decrease of money supply are almost equal to the inflow and the outflow of foreign currencies. In this situation, the central bank of Cambodia cannot do much to control the supply of money. Through monetary policies, the central bank could endeavour to stabilize the price level, the level of interest rates as well as help manage economic fluctuations, he added.

According to the report total financing available to support Cambodian development is expected to double to $23.4 billion in 2025 from $ 10.5 billion in 2015. Official development assistance (ODA) flows, which include both grants and loans, remained significant at 7.9 percent of GDP in 2020, but are expected to fall to 7.4 percent by 2025. At the same time, their composition has increasingly shifted from grants to loans, and often with less concessional terms.

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