Friday, July 2, 2010

Workshop on Strengthening the Role of Macroeconomic Policies


The Ministry of Economy and Finance and UNESCAP have organized a high Level Workshop on “Strengthening the response to the global financial crisis in Asia-Pacific: the role of macroeconomic policies” for three days from the 22nd to 24th of June in Phnom Penh.

The main purpose of the joint workshop was to provide an opportunity for Cambodia’s high level officials, policy makers and experts to conduct a focused discussion of concrete policy options to address these and other challenges facing the country’s economy.

The key experts are the high level officials from key partner countries of Cambodia such as People’s Republic of China, Thailand, Vietnam, Republic of Korea, and India as well as experts from ESCAP, ADB, UNDP, IMF and the World Bank.

H.E. Keat Chhon, Deputy Prime Minister and Minister of Economy and Finance, said that the workshop is timely, and would greatly contribute to enhancing the capacity of Cambodian makers in coping with the future global financial and economic crisis and improving the resilience of Cambodia’s economy in the future crisis.

“As we already knew, the global financial and economic crisis has affected every economy in the world, and the globalization has brought benefits, but also exposed countries to new potential vulnerabilities,” he said. “Policymakers need to be alert and keep up to date about these knew sources of vulnerabilities. Thus, I would like to emphasize the need for a stronger national capacity to conduct economic and financial surveillance,” he noted during his opening remarks at the workshop.

The Deputy Prime Minister added that after the Asian financial crisis, Asian countries embarked on bank restructuring and structural reforms which contributed to strong economic growth and financial stability. However, 2009 was a turbulent time for Asian and the world as a whole. Even though Asia’s financial institutions have strong external positions, nonetheless Asia was hit by the Global financial crisis because of the collapse of international trade and capital flows.

The initial stage of the crisis, all countries in the region experienced capital outflows driven by de-leveraging, and liquidity of the banking system tightened and the credit market dried up, he said, adding that the crisis resulted in the collapse of the international trade. This in turn has had negative impact on the real economy, posing considerable risks on the financial system.

“As shown in the advanced economies, the sharp corrections in asset prices resulted in wealth destruction, while households and firms face greater difficulty in gaining access to credit, to create a vicious cycle of de-leveraging between the real economy and the financial sector,” he said. “As a result, the private spending by households and firms collapsed. In this regard, the global financial crisis has returned fiscal policy as a major macroeconomic tool,” he added.

Fiscal policy is providing important support to the economy through large stimulus packages to support domestic demands while public spending is critical to bolster aggregate demand and to limit the impact of the financial crisis on the real economy, it implies a significant deterioration in the fiscal accounts. Therefore, a large fiscal space and moderate public dept are important to maintain confidence in medium-term fiscal sustainability.

Presently, global financial conditions have improved, international investor confidence is recovering gradually, indicators of the future production and demand have firmed, consumers confidence is improving, the earlier declines in manufacturing and employment have begun to be reversed, and lending to the private sector has gained a positive momentum.

Relating to Cambodia’s policy response to the crisis, H.E. Keat Chhon said Cambodia is a small and open economy, with capital account liberation trade. Cambodian economy is highly dependent on a sustained international trade expansion and foreign capital inflow.

“More than 90 percent of the banking transactions are dollarized. It means that we can not use an interest rate policy to influence the economy. With free capital flow, foreign exchange intervention has been used to stabilize the exchange rate and to increase international reserve position,” he said. “Policy response coordination, through the committee for economic and financial policies, is a crucial in a dollarized economy, in which fiscal policy also plays a crucial role,” he added.

The Royal Government of Cambodia has acted counter-cyclically to boost domestic demand, with increased public expenditure towards improving social safety nets and providing retraining and alternative employment for vulnerable population segments, including those losing jobs in the affected export sector, he said, adding that with the normalization of activity and firming of prices, Cambodia has begun removing exceptional monetary and fiscal policy support.

H.E. Keat Chhon said that taking these developments into accounts the growth in Cambodia is projected to rebound to about 5 percent pf GDP in 2010. However, diversifying the economy and strengthening its competitiveness will be crucial for Cambodia’s future economic development. He added that the recent crisis has tested the effectiveness of the various macroeconomic policies in restoring economic and financial stability, and the need for more effective regulatory and supervision frameworks.

Mr. Douglas Broderick, United Nations Resident Coordinator, said that while economic growth shows signs of resumption this year, around 4 million people still live in poverty in Cambodia, and many more are near poor. Rural poor households, representing the majority of Cambodia’s population, are particularly vulnerable to the impact of economic shocks such as this and are also affected by inequality.

The Royal Government of Cambodia defined ways to address these challenges in its Rectangular Strategy Phase II and the Update of the National Strategic Development Plan that was recently passed by the Senate. An important achievement in this respect has also been the progress in strengthening social protection for the poorest and most vulnerable – implementation of systematic measures in this area would represent a further important milestone in lessening hardship and vulnerabilities for those most affected, he said.

He pointed out that the crisis highlighted a number of challenges for Cambodia. In particular: How to mitigate the impact of similar economic downturns on vulnerable groups; How to mobilize additional domestic financial resources; How to coordinate macroeconomic policies to make them most effective; How to enhance the country’s competitiveness and diversify in its economy; and What structural reforms need to be made to preserve sustainable economic growth in the future.

Last year UNDP commissioned a synthesis study, “Global Financial Crisis and the Asia-Pacific Region”, incorporating evidence and experiences from a number of countries in the region, he said, adding that the study revealed that the global crisis has indeed adversely affected developing Asia, and some countries have been especially badly hit. Unlike many other regions of the world, on the whole, developing Asia is showing evidence of the ‘recovery’ that appears to be faster and more pronounced in this region.

“As Cambodia regains its economic momentum, we need to work harder than ever to ensure these goals are reached. Over the past two years – as in many countries in the region and around the world – Cambodia has suffered significant job losses, particularly in the garment and construction sectors,” he said. “We have also seen a reduction in household income for many homes. We should not only be concerned about 30 percent of Cambodians who live in poverty – we must also consider those who live just above the poverty line. Poor and near poor households that suffered losses of income and savings as they struggled to get through the recent lean times will take them time to rebuild and recover.”

No comments: