Decline in international aid raises concerns for Cambodia's economic stability


Cambodia's economy remains below pre-pandemic levels with a GDP per capita of US$1760, the second lowest in the region after Myanmar. - PPP

PHNOM PENH: A new report from the Lowy Institute has revealed that international partners have sharply reduced their development support to Cambodia, even though the country's economy remains fragile and below pre-pandemic levels.

The annual “South-East Asia Aid Map’s 2024 Key Finding Report” shows that total official development finance to Cambodia fell by 30 per cent in 2022, dropping to US$2.3 billion, in line with a broader regional trend for South-East Asia.

The reduction in aid to Cambodia is part of a larger pattern affecting the region. China, which provided over a third of Cambodia's development finance from 2015 to 2022, saw its support plummet to its lowest point in 2022, with little sign of recovery.

The Lowy Institute is an independent think tank which researches international political, strategic and economic issues from an Australian perspective. It receives funding from the Australian government, as well as from the private sector.

The decline in Chinese funding is significant given that China has historically been a major development partner for Cambodia, funding a mix of grants and non-concessional loans primarily focused on the transport and storage sector, as well as health.

“The decline in official development finance to Cambodia is concerning,” said Alexandre Dayant, Southeast Asia Aid Map project lead at the Lowy Institute.

“The South-East Asia Aid Map shows the ongoing importance of official development finance to Cambodia and the region, particularly its role in funding infrastructure, health, education and poverty reduction initiatives," he added, during the June 13 launch of the report, held at the Raffles Hotel Le Royal in Phnom Penh.

In contrast to China's reduced role, regional powers like India, Japan, and Korea have increased their support, suggesting a shift in Cambodia's development partnerships.

While Cambodia may not pivot to traditional Western donors, its pool of development partners could expand, potentially leading to more diversified and resilient economic growth.

The new edition of the South-East Asia Aid Map compiles millions of data points from 2015 to 2022.

The Map encompasses more than 120,000 projects, by 107 development partners, totalling $255 billion, across 11 countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Timor-Leste, and Vietnam.

“Despite these changes, traditional development partners collectively continue to dominate total financing, accounting for more than 80 per cent of total official development finance disbursements to South-East Asia in 2022,” according to the report.

It noted however, that the role of intra-regional development financing and assistance between Asean member states is growing, albeit from a low base. Thailand leads in this regard, followed by Vietnam.

Cambodia's economy, which became a lower middle-income country in 2015, remains below pre-pandemic levels with a GDP per capita of $1760, the second lowest in the region after Myanmar.

The country has seen impressive poverty reduction and some of the fastest economic growth in the world since the formal end of civil conflict in 1991.

However, the report said, significant development challenges remain, with governance cited as a primary barrier to growth and development.

“During the 2015-2022 period, more than 19,500 projects were implemented by 63 development partners in Cambodia, totalling more than $17.7 billion in funding,” according to the report, which will be available online from June 16.

It explained that notably, the period saw a fluctuation in official development finance, rising in response to the Covid-19 pandemic and then falling back in 2022. This fluctuation was largely driven by changes in Chinese development financing.

“China's development spending in Cambodia nearly doubled from 2015 to 2021 but fell dramatically to $386 million in 2022,” said the report.

Projects were mostly financed by the China Development Bank and Export-Import Bank of China, implemented by a mix of Chinese companies such as the China Road and Bridge Corporation, Shanghai Construction Group and the Shanghai Baoye Group.

“Chinese financing has plummeted to its lowest level on record in the country, which aligns with regional trends of Chinese development assistance in the region,” said Dayant.

“Once the primary development partner for half of all South-East Asian countries, Beijing now holds that position only for Malaysia and Laos,” he added.

Japan's development support, in contrast, stayed relatively constant pre-pandemic but ramped up significantly over 2020-2022.

This included major infrastructure projects like the Covid-19 Crisis Response Emergency Support Loan in January 2021, which was Japan's most substantial single disbursement to Cambodia.

The reduction in development support is especially concerning given the critical sectors it affects. Infrastructure, health, and education are heavily reliant on international aid.

The South-East Asia Aid Map claims that projects in these sectors have been essential for Cambodia's development, helping to combat diseases such as HIV and tuberculosis, and improving water resources and sanitation.

Climate vulnerability is another critical concern for Cambodia. Although climate financing grew from 2015 to 2022, it remains a small part of overall development finance.

Projects like the construction and expansion of the Bakheng Water Treatment Plant by the French Development Agency highlight the ongoing need for investment in climate resilience.

The report also noted an increase in financing for gender equality in Cambodia, driven by projects with a “significant” focus on gender rather than standalone initiatives.

However, funding through Asean for gender equality has dropped below pre-pandemic levels, indicating a need for renewed focus in this area, it cautioned.

“The South-East Asia Aid Map reveals a $5 billion increase in gender equality financing in the region from 2015 to 2022," said Grace Stanhope, research associate at the Lowy Institute Indo–Pacific Development Centre.

“But spending on projects where gender equality was the principal focus has declined over the same period.” She added.

As Cambodia continues to navigate its path to economic recovery and development, the reduction in international aid presents a significant challenge. - The Phnom Penh Post/ANN

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