Development finance: how much does Cambodia need and where will it come from?

17 Jul 2016

 Meeting between UNDP and Development Partners (Photo: ©UNDP Cambodia)

Cambodia has been one of the world’s fastest growing economies over the last decade. This growth has been translated into reduced levels of poverty and impressive progress towards reaching the Cambodia Millennium Development Goals (CMDGs). Average annual incomes now exceed US$1,000 per person.

CMDG Goal 1: The number of people living in poverty has fallen from 55% in 1990 to 18% in 2013 as seen in the attached Graph 1 (Source: World Bank). 

The World Bank has recently upgraded Cambodia’s economic status to Lower-Middle Income group. How then, will the transition affect its access to development finance, particularly as Official Development Assistance (ODA) declines? As Cambodia is presented with new opportunities from regional integration and prepares to take on new challenges, such as the implementation of its new Industrial Development Policy, where will financing come from?

To find the answers, it is important to reflect on the wider development landscape over the last decade. For one, many other developing countries have moved into the Middle Income group over the last 20 years and are now expected to mobilize more of their own domestic resources to support socio-economic development and improve public service delivery.

Cambodia's domestic revenue has now reached 18% of its DGP - about US$3.1 billion in 2015 as in Graph 2 attached (Source: Ministry of Economy and Finance). 

At the same time, some donors have changed their approaches by concentrating their support on other low-income countries or focusing on global challenges such as climate change and public health. Middle-income countries also receive more of their aid in the form of soft loans instead of grants. For Cambodia, it is possible to speculate that total aid levels have now peaked while the loan share has increased to around 41% of total support.

Development assistance in 2015 was US$1.34 billion but the loan share has increased over time to 41% as in Graph 3 attached (Source. CDC).

In addition, China, which is now Cambodia’s largest provider of development assistance, has emerged as a major player through the Asian Infrastructure Investment Bank which has a capital subscription of US$100 billion. Similarly, the Green Climate Fund will provide US$100 billion a year globally by 2020. Finally, the private sector is either partnering directly with the state to develop infrastructure or through philanthropy, sustainability initiatives and corporate social responsibility.

Estimating the costs of development is far more challenging than identifying current and potential sources of financing. Investment requirements will depend on a wide range of factors related to the strategies adopted, the interaction between them, actual implementation, the impact and sustainability of development expenditures and the external environment.

Cambodia’s Ministry of Planning has estimated that US$26.8 billion of total capital investment is required for the 2014-2018 period. Success in reaching the 17 Sustainable Development Goals will depend on managing a wide range of partnerships so that resources can be effectively mobilized and managed.

This month, UNDP partners with the government to prepare a Development Finance Assessment to review recent trends in resource mobilization and consider new financing options. The study will assess potential revenue sources and identify capacities needed for resource mobilization and the management systems that will finance the country’s development and the 2030 Sustainable Development Agenda.

Despite its reclassification as a Lower Middle-Income Country, Cambodia’s transition from a Least Developed Country will take perhaps another ten years while its human asset and economic vulnerability indices remain within the LDC category. It will be important for Cambodia to use its LDC status to continue mobilizing grant aid and soft loans as well as building new partnerships with other public and private providers of finance. The forthcoming Development Finance Assessment will thus support the government in identifying, mobilizing and managing these new sources of funding that are vital to its development effort.nding that are vital to its development effort.