Cambodia Investment Review

Policy Recommendations for Cambodia’s Economic Recovery: Insights from World Bank’s June 2024 Update

Policy Recommendations for Cambodia’s Economic Recovery: Insights from World Bank’s June 2024 Update

Cambodia Investment Review

The World Bank’s June 2024 Cambodia Economic Update outlines critical policy recommendations against the backdrop of an ongoing economic recovery. Despite a marginal uptick in economic activity and an expected growth forecast of 5.8% for 2024, the report emphasizes the need for strategic fiscal and financial measures to ensure sustainable growth.

Read More: Cambodia’s Economic Activity Rises in Early 2024, World Bank June Report Highlights Key Areas for Sustained Growth with Projections of 5.8% for 2024 and 6.1% for 2025

Restoring Fiscal Space

The report highlights the importance of restoring fiscal space as Cambodia’s fiscal buffers have diminished following years of government fiscal intervention. Key recommendations include:

  1. Reviewing Tax Incentives: The World Bank suggests reassessing the increasingly generous tax holidays and exemptions. This review aims to enhance the efficiency of tax incentives and ensure that they are targeted toward sectors that significantly contribute to economic growth.
  2. Corporate Income Tax Reform: Broadening the tax base and strengthening compliance through corporate income tax reform is essential. The report stresses the need to close loopholes and ensure fair taxation to improve revenue collection.
  3. Introducing Personal Income Tax: As a medium-term objective, the introduction of a personal income tax is recommended to diversify the revenue base. This measure would require careful planning and phased implementation to minimize adverse impacts on lower-income groups.

Safeguarding Financial Stability

The report underscores the importance of safeguarding financial stability in light of high levels of private debt, rising non-performing loans (NPLs), and falling returns on banking sector assets. Recommendations include:

  1. Intensified Bank Supervision: Enhanced bank supervision is crucial, with measures such as stress testing of individual institutions, systematic onsite inspections, and alignment of the regulatory framework with international standards.
  2. Consolidation of Financial Institutions: The rapid growth of financial institutions until 2022 calls for sector consolidation through mergers and acquisitions. This would improve efficiency and increase market share, helping preserve profit margins.
  3. Preparedness for NPLs: Ensuring that resolution options for NPLs are ready to be deployed as needed is vital. Strengthening the country’s insolvency regime and continuing efforts to prepare legislation on deposit insurance and bank resolution are also recommended.

Creating a Business-Friendly Environment

To foster a conducive business environment, the report identifies several key areas for improvement:

  1. Addressing Informal Sector Practices: Promoting business registration and reducing the tax compliance burden are necessary steps to address the constraints posed by the informal sector, tax rates, and tax administration.
  2. Streamlining Customs and Licensing Processes: Accelerating the implementation of pre-arrival processing electronically and automating customs clearance procedures are essential to reduce the time needed for exports and imports. Simplifying business entry requirements and digitalizing business services, especially the issuance of licenses and permits, will help reduce costs.
  3. Implementing the National Single Window: Fast-tracking the final phase of the National Single Window to include licenses, permits, certificates, and other documents is crucial. Additionally, the swift implementation of licensed economic operators will streamline business operations.

Enhancing Education and Workforce Development

The report emphasizes the need to boost learning outcomes to develop a “future-ready” workforce, which is fundamental for driving Cambodia’s productivity growth. Recommendations include:

  1. Improving Early Childhood and Primary Education: Increasing enrollment in early childhood education and addressing the decline in learning outcomes in primary schools are critical steps.
  2. Supporting Secondary Education: Ensuring that students progressing to secondary school are adequately prepared and reducing dropout rates are necessary to improve overall education quality.

Improving Logistics and Infrastructure

Logistics performance and infrastructure development are highlighted as key areas for improvement:

  1. Reducing Transport and Logistics Costs: Monitoring the efficiency of main trade gateways such as ports and border checkpoints is essential. Establishing a team and local authorities dedicated to facilitating trade, especially for road transport, is recommended.
  2. Upgrading Electricity Supply: Addressing the reliability of electricity supply is crucial for advancing to higher-value-added manufacturing and agro-processing industries. Significant investments are needed to meet rapid growth in electricity demand while adhering to climate change commitments.
  3. Enhancing Urban Services: Investments in basic urban services, including piped water, sanitation, solid waste management, telecommunications, and transport, are necessary to support urban planning and development.

The World Bank’s policy recommendations aim to guide Cambodia through its ongoing recovery, ensuring sustainable and inclusive economic growth. Implementing these measures will be key to addressing current challenges and achieving long-term economic stability and prosperity.

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