Who will finance development in Cambodia?

24 May 2017

 UNDP's staff holding notes to demonstrate the linkage among the leadership, policies, UNDP's support and development.

The Government is well positioned to lead and finance the next stage of national development. Managing partnerships with the private sector will be of increased importance while Cambodia’s development partners and NGOs will need to adapt to new roles in support of the SDGs.

Last week’s World Economic Forum on ASEAN highlighted the pressing need to accelerate infrastructure development and to improve connectivity in the region. Opening the meeting, Prime Minister Hun Sen emphasized the importance of investments, from within and outside the country, in boosting competitiveness and moving Cambodia’s fledgling industry up the value chain. Elsewhere in the meeting, participants noted the need to invest in education and skills as well as to promote the transfer of technology.

All of this will cost money. In addition, the Government has shown a strong commitment to continuing its pro-growth policies and to localising the Sustainable Development Goals (SDGs). Strengthening Government institutions and capacities to improve public services and deliver on its commitments to the SDGs will come with a hefty price tag.

So where will the money come from? Recent work completed by UNDP in partnership with the Royal Government’s Council for the Development of Cambodia (CDC) - called the Development Finance Assessment - has assessed the different available sources for financing for these ambitious programmes.

The results have been encouraging. Perhaps the most noteworthy headline is that the Government itself will increasingly become the main funder of Cambodia’s development. Impressive progress has been made in strengthening revenue management and tax administration. As a result, Cambodia’s own tax and non-tax revenues totaled an impressive USD 3.5 billion in 2016. This is equivalent to nearly 18% of GDP and represented a 15% increase on the 2015 performance. Clearly, this places the Government in a strong position to finance more public investment and to exercise strong leadership in coordinating the resources of other development actors.

The contributions of development partners, for example, have long been the main source of development finance in Cambodia. But these flows peaked in 2012 at around USD 1.5 billion. In 2016, total development partner flows, including from NGOs, are estimated to be around USD 1.3 billion. When compared to Government’s own revenues, the importance of programming and using Government’s own revenues effectively is brought into clear focus. Development cooperation will nevertheless remain an important source of finance and will support the provision of vital economic infrastructure as well as supporting the strengthening of Government’s capacity to provide public services. Climate financing from global initiatives may also become a significant resource for Government.

Other sources of funding are also rising even as aid and development cooperation begins to taper off. Foremost amongst them is Foreign Direct Investment (FDI), which was recorded at its highest ever level in 2016, reaching 2.3 billion according to data from the National Bank of Cambodia, up more than one-third since 2015. The challenge for Government is to ensure that these funds are directed to investments that have a strong development impact and are truly transformational in creating new industries and economic opportunities for Cambodian workers. In this regard, on-going policy work by Government to develop a new policy on Public-Private Partnerships will also be important.

Shifting the perspective from the larger economy-wide activities of firms and foreign investors towards private individuals, there is also positive news. Record numbers of Cambodians now work as migrant laborers with an estimated 1 million working overseas. Remittances have therefore risen dramatically over the last decade, exceeding USD 1 billion annually according to the Ministry of Labour and Vocational Training. Remittances are of course private flows, they are not available to the Government, but they nevertheless make perhaps the most positive impact on people’s lives as families can decide for themselves how to use these funds. The role for the Government is to strengthen the legal framework for migrant workers, ensuring that safeguards are provided, rights are assured and money can be sent home securely.

Overall, the total resources potentially available from all sources - Government, FDI, the domestic private sector, development partners, remittances - to finance the development effort is about 50% of GDP. This is about USD 10 billion in 2016. With effective leadership, clear policies and with continued support from UNDP and its other partners, Government is well positioned to lead and fund the next phase in Cambodia’s development.