For Cambodia, the impact of COVID-19 is similar to a simulation of the withdrawal of the EU-driven Everything But Arms (EBA) trade scheme. If EBA is withdrawn, it would be “a nail in the coffin” of the already dying garment industry, the country’s biggest employer, writes Sim Vireak.
Sim Vireak is an Advisor to the Asian Vision Institute.
Back in December 2019, the IMF warned that the withdrawal of the European Union’s trade preferences under the Everything But Arms scheme from Cambodia would cause a decline of exports to the EU of about 13%, and a 3 percentage point decline in GDP growth, without prejudice to other indirect effects.
In terms of jobs, an estimate was made that in the vital garment sector, 43% of workers (nearly 225,000 people) plus 20% of workers in footwear factories (more than 20,000 people) would become unemployed.
This projection is becoming reality but not because of the actual EBA withdrawal but due to the global epidemiological and economic crisis unleashed by COVID-19.
In the latest report in May 2020, the World Bank estimated that Cambodia’s economy is likely to register its slowest growth since 1994, contracting between -1% (baseline) and -2.9 percent (downside). Poverty could increase between 3 and 11 percentage points from a 50% income loss that lasts for six months for households engaged in tourism, wholesale and retail trade, garment, construction, or manufacturing.
With job losses, the same goes for income. This has caused severe strain on many workers that have applied for microloans, using their jobs as leverage.
According to the Cambodia Microfinance Association (CMA), 137,000 people have already requested loan relief amid the economic slowdown in the form of loan restructuring, interest payment deferrals or postponement of all payments.
This accounted for only 5% of the total 2.2 million microloan borrowers, and the worst has yet to come.
In terms of jobs, as of May 2020, with the suspension of 256 garment, footwear and travel goods factories in Cambodia due to the COVID-19 pandemic, more than 130,000 workers have been affected. Besides, about 169 companies in tourism sector had also been closed temporarily, leaving roughly 16,891 people unemployed.
Cambodia’s garment sector is not an isolated case. Vietnam’s garment and textile exports in the first four months fell 10 per cent year-on-year and could fall much further as buyers cancelled orders due to COVID-19. It is estimated that Vietnam’s 2020 apparel exports could decrease by 20% over the previous year with a global number drop between 20-25%.
For Cambodia, the impact of COVID-19 is similar to a simulation of the possible EBA withdrawal. In the current situation, if EBA is withdrawn, it would signify “a nail in the coffin” of the already dying garment industry.
Amid these economic challenges, Cambodian government has taken various emergency measures to curb the impact on possible fallout of an industry that feeds billions of dollars of incomes to Cambodian workers, mostly women. The EU had recently made a $66.7 million grant to help Cambodia’s economy.
In early June, the government unleashed the fourth round of interventions aimed to minimise impact on the whole Cambodian economy, especially on growth pillars such as the garment, tourism, and construction industries. These included tax measures to stabilise businesses and the living condition of employees. The government has exempted all kinds of monthly tax on the hospitality sector in Phnom Penh, Siem Reap, Preah Sihanouk, Kep, Kampot, Bavet and Poi Pet for two months from June to July 2020. Employers will also be exempted from payments for insurance and the national fund for social security.
Secondly, financial funding support for businesses was allocated by providing special fund of $50 million to be implemented by the Rural and Agricultural Development Bank, and $100 million to be implemented by SME Bank of Cambodia. Additionally, $300 million is also being earmarked for the Ministry of Economy and Finance to support key growth sectors during and after the crisis.
Finally, social measures have also been devised. The “labour for cash programs” will receive $100 million to absorb labour forces that have been affected by factories’ suspension. This budget will be used to build small physical infrastructures at local levels for the sake of uplifting agriculture and rural economy.
Beyond the emergency intervention measures, it is equally important that Cambodia considers taking various long-term measures to prepare the country for the post-Covid economy. Many examples can be taken from countries in the region.
For instance, Thailand and Vietnam are competing hard to welcome factories’ relocation from China, utilising their sophisticated logistics network and pro-business environment. Many companies have been looking for alternatives to China to manufacture goods, originally to get around US tariffs. However, Covid-19 outbreak has strengthened this trend after the severe disruption of production and supply chain that relies heavily on “Factory China”. Thailand also embarked on five infrastructure megaprojects in their Eastern Economic Corridor (EEC) to support foreign investment, such as high-speed railway linking three airports; U-tapao aviation city; a maintenance, repair and overhaul (MRO) centre; development of Laem Chabang seaport; and development of Map Ta Phut seaport.
In the same vein, Cambodia’s massive infrastructure development in Sihanoukville indicates similar rationale. Cambodian government has disbursed $350 million to build road infrastructure in the Preah Sihanouk province with the future goal to transform the city into a multi-purpose special economic zone, international financial center and potentially the industrial hub of Cambodia. Sihanoukville airport run by the French Vinci Group has been refurbished with extended runway up to 3,800 meters to be put in operation later this year. The renovation of the passenger arrival terminal will be completed by 2022.
Beside physical infrastructure, industrial diversification to non-garment sectors and future job creation measures should be put on top priority.
In Singapore, National Jobs Council has put up a package that aims to support close to 100,000 job seekers over the next 12 months by creating new vacancies, traineeships and skills training places.
Countries in the region have increased efforts to support the growing size of the digital economy. For instance, Indonesia will impose a 10% value-added tax on digital services provided by non-resident companies starting on 1 July. According to the new regulation, the tax applies to companies with a “significant economic presence” in the country, operating in sectors such as software, multimedia, and data. The Philippines is also considering similar measures.