What Is Cambodia’s New Debt Management Strategy?

Cambodia Aims to Balance Debt and Development in New Strategy

In a bid to ensure sustainable economic growth while managing its financial obligations, the Cambodian government has unveiled a new Public Debt Management Strategy for 2024-2028. This strategic approach aims to strike a balance between borrowing responsibly and supporting Cambodia’s economic development goals, reflecting a proactive effort to safeguard the nation’s financial future.

Context and Motivation for the New Strategy

As of the first quarter of 2024, Cambodia’s total public debt stood at $11.09 billion, with projections indicating that this figure could reach $12 billion by the end of the year. The government’s motivation behind the new debt management strategy is twofold: firstly, to maintain sustainable and responsible borrowing practices; and secondly, to align these practices with the country’s ambitious economic targets of achieving upper-middle-income status by 2030 and high-income status by 2050.

Read more: What Are the Key Challenges to Blockchain Adoption in Cambodia?

This strategy is seen as a necessary step given the current global economic uncertainties and Cambodia’s development aspirations. It seeks to address concerns about debt sustainability while ensuring that the country continues to attract the necessary investment to support its growth trajectory.

Key Features of the Public Debt Management Strategy

The Public Debt Management Strategy, published on August 26, 2024, is a comprehensive document outlining all public debt operations, including lending, state guarantees, and debt risk management. Here are some of the strategy’s key features:

1. Annual Borrowing Limits and Ceilings: The strategy sets an annual borrowing limit between 1.7 billion and 2 billion Special Drawing Rights (SDRs). An SDR is an international reserve asset created by the International Monetary Fund (IMF), valued based on a basket of five major currencies. While Cambodia could potentially increase its borrowing to 2.5 billion SDRs annually, the government has set a cumulative borrowing ceiling of 10 billion SDRs over the five-year period. This cap, translating to about $13.5 billion USD, aims to prevent excessive borrowing and manage the debt burden effectively.
2. Issuance of State Securities: Cambodia issues between 500 billion and 1 trillion riel ($123 million to $246 million) in state securities annually. Although the figure could rise to 1.2 trillion riel ($295 million) per year, a cumulative ceiling of 4 trillion riel ($984 million) over five years has been established. This measure is designed to ensure that the government’s borrowing from domestic sources remains within sustainable limits.
3. Cap on Payment Guarantees: To avoid unsustainable financial obligations, the government has capped payment guarantees for new projects at 10 percent of the previous year’s national budget revenue. Furthermore, the state has discontinued direct credit and loan guarantees to the private sector, thereby reducing fiscal risks associated with contingent liabilities.
4. Maintaining Debt-to-GDP Ratio: The strategy emphasizes keeping the public debt-to-GDP ratio below 55 percent, a threshold that is crucial for maintaining financial stability and investor confidence. With the current foreign public debt relative to GDP below 40 percent, the government aims to keep this ratio low to prevent economic instability.
5. Debt Composition and Interest Rate Management: At least 90 percent of the public debt inventory is mandated to be composed of fixed-interest rate debt components. This approach minimizes exposure to interest rate fluctuations and helps maintain stable debt servicing costs, providing a buffer against external economic shocks.

Advantages of the New Strategy

The new debt management strategy offers several advantages for Cambodia’s economic development:

1. Promotes Sustainable Economic Growth: By setting clear borrowing limits and ensuring responsible debt management, the strategy promotes sustainable economic growth. It allows for the financing of critical infrastructure and development projects without jeopardizing fiscal health, aligning with the government’s long-term economic goals.
2. Enhances Fiscal Stability: With measures in place to cap borrowing and limit exposure to interest rate fluctuations, the strategy enhances fiscal stability. This stability is essential for attracting foreign investment and maintaining confidence in Cambodia’s economic policies.
3. Reduces Financial Risks: The strategy’s focus on fixed-interest rate debt and discontinuing risky credit guarantees to the private sector helps reduce financial risks. This risk management approach protects the economy from unforeseen financial crises and external economic shocks.
4. Improves Debt Transparency and Accountability: By clearly outlining borrowing limits, debt composition, and management practices, the strategy improves transparency and accountability in public financial management. This openness is likely to enhance trust among international financial institutions and development partners, potentially leading to better financing terms and more robust economic support.
5. Supports Development Goals: The strategy aligns with Cambodia’s vision of becoming an upper-middle-income country by 2030 and a high-income country by 2050. By ensuring that debt remains within manageable limits, the government can channel resources into sectors that drive economic growth, such as infrastructure, education, and healthcare.
6. Encourages Responsible Borrowing Practices: The strategy encourages responsible borrowing by setting clear guidelines on borrowing limits and conditions. This disciplined approach ensures that borrowed funds are used efficiently and effectively, contributing to the country’s development without compromising fiscal health.

Challenges and Considerations

While the new strategy offers numerous advantages, there are also challenges and considerations that need to be addressed to ensure its success:

1. Global Economic Uncertainty: The global economic landscape remains unpredictable, with potential impacts from geopolitical tensions, fluctuating commodity prices, and changes in international trade policies. These factors could affect Cambodia’s economic performance and its ability to manage debt sustainably.
2. Need for Robust Institutional Capacity: Effective implementation of the strategy requires strong institutional capacity. This includes a robust legal framework, effective policies, and a reliable information technology system. The government must ensure that these components are in place and functioning effectively to manage public debt responsibly.
3. Continued Vigilance Required: Despite the relatively low debt-to-GDP ratio, continued vigilance is required to monitor and manage debt levels. This includes regularly assessing debt sustainability, reviewing borrowing practices, and making adjustments as needed to respond to changing economic conditions.
4. Balancing Development Needs with Debt Sustainability: While the strategy aims to balance development needs with debt sustainability, there is always a risk that unforeseen circumstances could necessitate additional borrowing. The government must remain flexible and adaptable in its approach to managing public debt, ensuring that it can respond effectively to changing circumstances without compromising fiscal health.

Cambodia’s new Public Debt Management Strategy for 2024-2028 represents a forward-looking approach to managing the country’s financial obligations while supporting its development ambitions. By setting clear borrowing limits, capping payment guarantees, and focusing on debt sustainability, the strategy aims to ensure that Cambodia can continue to grow and develop without compromising its financial stability.

Read more: What Factors Make Investors Confident in Cambodia’s Economy?

As Cambodia strives to achieve its economic goals, the new strategy provides a roadmap for responsible borrowing and effective debt management. It underscores the importance of balancing debt and development to ensure long-term economic prosperity.

What are your thoughts on Cambodia’s new debt management strategy? Do you think it will successfully balance debt and development? Share your views in the comments below!