Report and Recommendation of the President to the Board of Directors

Project Number: 54195-001 June 2020

Proposed Countercyclical Support Facility Loan Kingdom of Cambodia: COVID-19 Active Response and Expenditure Support Program Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB's Access to Information Policy after excluding information that is subject to exceptions to disclosure set forth in the policy.

CURRENCY EQUIVALENTS (as of 26 June 2020)

Currency unit – riel/s (KR)

KR1.00 = $0.0002453987 $1.00 = KR4,075.000500

ABBREVIATIONS

ADB – Asian Development Bank CARES – COVID-19 Active Response and Expenditure Support COVID-19 – coronavirus disease CPRO – COVID-19 pandemic response option FDI – foreign direct investment GDP – gross domestic product GTF – garments, textiles, and footwear IDPoor – Identification of Poor Households Programme IMF – International Monetary Fund MEF – Ministry of Economy and Finance MOH – Ministry of Health NBC – National Bank of Cambodia OPs – operational priorities PFM – public financial management SMEs – small and medium sized enterprises TA – technical assistance WHO – World Health Organization

NOTE

(i) In this report, “$” refers to United States dollars.

Vice-President Ahmed M. Saeed, Operations 2 Director General Ramesh Subramaniam, Southeast Asia Department (SERD) Director Jose Antonio R. Tan III, Public Management, Financial Sector and

Trade Division (SEPF), SERD Sunniya Durrani-Jamal, Country Director, Cambodia Resident Mission (CARM), SERD Ayako Inagaki, Director, Human and Social Development Division (SEHS)

Team leaders Jhelum Tini Thomas, Senior Public Management Specialist, SEPF,

SERDa

David Freedman, Country Economist, CARM, SERD Azusa Sato, Social Sector Specialist, SEHS, SERDb

Team members Benita Ainabe, Financial Sector Specialist (Capital Markets), SEPF, SERD Rosemary Victoria Atabug, Social Development Officer (Gender and Development), Gender Equity Thematic Group, Sustainable Development and Climate Change Department (SDCC) Sara Azfar, Senior Partnerships Specialist, Strategic Partnerships Division, Strategy, Policy and Partnerships Department Eduardo Banzon, Principal Health Specialist, Health Sector Group, SDCC Florissa Barot, Project Analyst, SEPF, SERD Md. Abul Basher, Natural Resources and Agriculture Specialist, Rural Development and Food Security (Agriculture)Thematic Group, SDCC Elizabeth Burges-Sims, Senior Social Development Specialist (Gender and Development), SEHS, SERD Chandy Chea, Senior Social Development Officer (Gender), CARM, SERD Jennalyn Delos Santos, Operations Assistant, SEPF, SERD Poullang Doung, Senior Economics Officer, CARM, SERD Haidy Ear-Dupuy, Senior Social Development Specialist (Core Labor Standards), Safeguards Division, SDCC Anna Fink, Economist (Regional Cooperation), Regional Cooperation and Integration Thematic Group, SDCC Anthony Robert Gill, Senior Regional Cooperation Specialist, Regional Cooperation and Operations Coordination Division, SERD Anne Gin, Procurement Specialist, Procurement Division 2, Procurement, Portfolio and Financial Management Department (PPFD) Steven Goldfinch, Disaster Risk Management Specialist, Climate Change and Disaster Risk Management Division, SDCC Madhumita Gupta, Principal Social Development Specialist (Safeguards), SDSS, SDCC Shanti Jagannathan, Principal Education Specialist, Education Sector Group, SDCC Sameer Khatiwada, Social Sector Specialist (ICT), SEHS, SERD Sung Su Kim, Financial Sector Specialist (Inclusive Finance), Finance Sector Group, SDCC

Team members Rouselle Lavado, Senior Health Specialist, Social Sector Division, Central and West Asia Department (CWRD) Sevil Maharramova, Financial Management Specialist, Public Financial Management Division, PPFD Sunghoon Kris Moon, Urban Development Specialist, Urban Sector Group, SDCC Christopher Morris, Principal Social Development Specialist (NGO & Civil Society Ctr), SDCC Kaukab Naqvi, Senior Economist, Economic Research and Regional Cooperation Department Chamroen Ouch, Senior Programs Officer (Governance), CARM, SERD Hyun Chol Park, Senior Financial Control Specialist, Loan and Grant Disbursement Section, Controller's Department Lynnette Perez, Senior Education Specialist, SEHS, SERD Daniele Quaggiotto, Counsel, Office of the General Counsel Francesco Ricciardi, Environment Specialist, SDSS, SDCC Robert Valkovic, Principal Transport Specialist, Transport Sector Group, SDCC Michiel Van der Auwera, Senior Financial Sector Specialist (Social Security), Public Management, Financial Sector, and Trade Division, CWRD Hongwei Zhang, Senior Finance Specialist (Energy), Energy Division, South Asia Department

Peer reviewers David Aaron Robinett, Senior Public Management Specialist (State Owned Enterprise Reforms), Governance Thematic Group, SDCC Kumanan Rasanathan, Coordinator, Health Systems, World Health Organization

a Outposted to the Cambodia Resident Mission. b Outposted to the Indonesia Resident Mission.

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area

CONTENTS Page

PROGRAM AT A GLANCE

I. THE PROPOSAL 1

II. PROGRAM AND RATIONALE 2

A. Background and Development Constraints 2

B. Proposed Program, Impacts and ADB’s Value Addition 9

C. Development Financing Needs, Budget Support and Debt Sustainability 10

D. Development Partner Coordination 11

E. Implementation Arrangements 11

III. DUE DILIGENCE 12

IV. ASSURANCES 13

V. RECOMMENDATION 13

APPENDIXES

1. Design and Monitoring Framework 14

2. List of Linked Documents 16

3. Development Policy Letter 17

4. Assessment of Compliance with the Countercyclical Support Facilty Access Criteria 20

Project Classification Information Status: Complete

PROGRAM AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 09062020111750823475 Generated Date: 23-Jun-2020 19:25:02 PM

1. Basic Data Project Number: 54195-001Project Name COVID-19 Active Response and

Expenditure Support ProgramDepartment/Division SERD/SEPF

Country Cambodia Executing Agency Ministry of Economy and FinanceBorrower Kingdom of Cambodia

Country Economic Indicators https://www.adb.org/Documents/LinkedDocs/?id=54195-001-CEI

Portfolio at a Glance https://www.adb.org/Documents/LinkedDocs/?id=54195-001-PortAtaGlance

2. Sector Subsector(s) ADB Financing ($ million)Public sector management Public expenditure and fiscal management 85.00

Social protection initiatives 85.00

Health Disease control of communicable disease 40.00

Health system development 40.00

Total 250.00

3. Operational Priorities Climate Change InformationAddressing remaining poverty and reducing inequalities

Accelerating progress in gender equality

Strengthening governance and institutional capacity

Fostering regional cooperation and integration

GHG reductions (tons per annum) 0Climate Change impact on the Project

Low

ADB Financing

Adaptation ($ million) 0.00

Mitigation ($ million) 0.00

Cofinancing

Adaptation ($ million) 0.00

Mitigation ($ million) 0.00

Sustainable Development Goals Gender Equity and MainstreamingSDG 1.aSDG 2.1SDG 3.8, 3.dSDG 5.cSDG 8.1SDG 10.4

Effective gender mainstreaming (EGM)

Poverty TargetingGeneral Intervention on Poverty

4. Risk Categorization: Complex .

5. Safeguard Categorization Environment: C Involuntary Resettlement: C Indigenous Peoples: C.

6. Financing

Modality and Sources Amount ($ million)

ADB 250.00 Sovereign COVID19 Pandemic Response Option (Concessional Loan): Ordinary capital resources

250.00

Cofinancing 0.00 None 0.00

Counterpart 0.00 None 0.00

Total 250.00

Currency of ADB Financing: US Dollar

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to the Kingdom of Cambodia for the COVID-19 Active Response and Expenditure Support Program (CARES) Program under the Countercyclical Support Facility – COVID-19 pandemic response option (CPRO).1

2. The CARES Program, under the CPRO of the Asian Development Bank (ADB), will provide critically needed support to help the government mitigate the adverse health, social, and economic impacts caused by the coronavirus disease (COVID-19) pandemic. It will provide general budgetary support for the delivery of (i) health measures to combat the spread of COVID-19; (ii) social assistance and relief for affected people; and (iii) an economic stimulus for hard-hit business segments such as small and medium-sized enterprises (SMEs).

3. Cambodia has a record of sound macroeconomic management, yet is highly vulnerable because of its open economy and narrow economic base. The reported cases of COVID-19 as of 23 June are low at 130 (127 recovered and no deaths), but the World Health Organization (WHO) warns that Cambodia remains at high risk of a second wave of the outbreak that would rapidly overwhelm the health system. This would further compound the impact of the global slowdown on the key engines of Cambodia’s economy: (i) garments, textiles, and footwear (GTF); (ii) tourism; and (iii) construction. ADB’s growth forecast for Cambodia for 2020 was revised downward to reflect the expected slowdown from a pre-COVID-19 forecast of 6.8% to –5.5%.2

4. COVID-19 threatens to undermine Cambodia’s progress in poverty reduction. Vulnerable groups such as women and migrant workers are especially at risk. The crisis will lead to an estimated loss of 570,000 jobs and threatens to push an additional 1.1 million people into moderate poverty and 205,000 people into extreme poverty.3 With lower revenues and new spending needs, the government’s financing needs for 2020 have also risen from $1.7 billion to $3.5 billion, of which $2.2 billion is planned to be financed through external borrowing. The government has sought CPRO support of $250 million. Cambodia meets the required CPRO access criteria (Table 1).4 The CARES Program will assist the government in providing a responsive countercyclical stimulus package while maintaining overall macroeconomic stability. Cambodia will remain at moderately low risk of debt distress following the CARES Program. The program is aligned with the country partnership strategy 2019–2023 for Cambodia,5 and Cambodia’s commitment to collective regional action against COVID-19.6

Table 1: Compliance with Access Criteria for COVID-19 Pandemic Response Option Access Criteria ADB Staff Assessment

1. Adverse impact of exogenous shocks

The economy is projected to contract by 5.5% due to the pandemic’s impact. This will likely lead to increase in unemployment rate from 0.7% to 4.4%, pushing an additional 1.3 million into either moderate or extreme poverty. Due to COVID-19, government revenues will decline by 30.9%, with the 2020 fiscal balance is

1 ADB. 2020. Policy Paper: ADB’s Comprehensive Response to the COVID-19 Pandemic. Manila. 2 ADB. 2020. Asian Development Outlook Supplement. Manila. The updated growth projection reflects analysis from

ADB’s Economics and Research Department and close consultation with Cambodia’s Ministry of Economy and Finance (MEF).

3 Employment and Poverty Impact Assessment (accessible from the list of linked documents in Appendix 2). 4 Details on compliance with the access criteria are in Appendix 4. 5 ADB. 2019. Country Partnership Strategy: Cambodia, 2019–2023 —Inclusive Pathways to a Competitive Economy.

Manila. 6 Regional Cooperation and Integration Assessment Summary (accessible from the list of linked documents in

Appendix 2).

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Access Criteria ADB Staff Assessment

estimated to worsen from -5.9% of GDP to -12.8%, and the current account deficit will widen from -13.4% to -23.3% of GDP. Cambodia also remains vulnerable to a COVID-19 outbreak. With GTF, tourism and construction accounting for 43.2% of GDP, economic revival is likely to be slow and complex.

2. Countercyclical development expenditures

Government announced a pro-poor countercyclical fiscal response of $815.7 million (3.2% of the projected 2020 GDP) to support health system preparedness, boost social assistance and mitigate the adverse economic impact. The program is pro-poor, and the largest allocation of $300 million is for poor and vulnerable groups including women and children.

3. Record of generally sound macroeconomic management

During 2015–2019, GDP growth averaged 7.1% underpinned by high FDI inflows, strong export performance, and increasing domestic demand; and inflation averaged 2.5%. A deficit in the current account had been offset by large inflows of FDI and other receipts, and the import cover increased from 5.7 months to 8.8 months. Pre-COVID-19 domestic revenue mobilization improved from 17.1% of GDP in 2014 to 25.1% of GDP in 2019. Public debt remained low at 29.6% of GDP in 2020. Government deposits reached 22% of GDP in 2019.a

4. Structural reforms

Cambodia is taking credible steps to strengthen its health system, prevent the spread of COVID-19, and manage the socio-economic impacts of the crisis. The government rapidly developed its Master Plan for COVID-19 Response in March 2020, supported by WHO. It has a strong track record of policy reforms, and its COVID-19 response is focused on the poor and vulnerable. In parallel, triggered by concerns on the narrow economic base, the government has also begun focusing on diversification into higher value manufacturing including electronics assembly and vehicle parts. Tourism revival will get priority attention through targeted tax relief and the wage subsidy program.

5. Debt sustainability

ADB analysis confirms that the CARES Program will not significantly affect the overall debt ratio. Public debt is expected to increase from 29.6% of GDP to up to 39.9% in 2020–2021 due to the contracting economy and worsening fiscal deficit. Cambodia is rated as being at low risk of debt distress.

6. Coordination with the IMF

ADB consulted with the IMF on macroeconomic monitoring and the fiscal response to the COVID-19 crisis. The IMF provided an assessment letter with a macroeconomic outlook and confirms that downside risks are substantial.

ADB = Asian Development Bank, CARES = COVID-19 Active Response and Expenditure Support, COVID-19 = coronavirus disease, GTF = garments, textiles and footwear; FDI = foreign direct investment, GDP = gross domestic product, IMF = International Monetary Fund, WHO = World Health Organization. a National Bank of Cambodia; Cambodia National Institute of Statistics; ADB estimates. Source: Asian Development Bank.

II. PROGRAM AND RATIONALE

A. Background and Development Constraints

5. Cambodia’s health system is under prepared for the pandemic. Cambodia has been successful in keeping confirmed COVID-19 cases low due to initial containment efforts, but the country remains highly vulnerable to a surge partly because of the potentially large number of asymptomatic carriers among a young population. Pandemic preparedness remains low, despite being extremely cost-effective.7 The Ministry of Health (MOH) and WHO assess Cambodia’s country preparedness capacity at less than 60%,8 with critical deficiencies in prevention, and detection and emergency response capacities, particularly at subnational level.9 At the community

7 Sector Assessment (Summary): Health (accessible from the list of linked documents in Appendix 2). 8 WHO. 2020. Country Preparedness and Response Status for COVID-19 as of 11 May 2020 (accessed 15 May 2020). 9 WHO. 2020. Electronic State Parties Self-Assessment Annual Reporting (accessed 18 April 2020).

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level, rapid response teams, which are currently 22% female, require further capacity for case detection and contact tracing, and a better gender balance to more effectively reach women and children. Only two laboratories undertake reliable molecular testing for COVID-19, with a maximum testing capacity of 900 samples a day,10 and the systems for transferring specimens from provinces outside Phnom Penh are inadequate. Referral hospitals operate with bed occupancy at 80%–100% and many lack sufficient measures for patient isolation and intensive care.11 Staff require further training in the clinical management of COVID-19, supported by a more gender-balanced response in service delivery.

6. Heightened risk of infections from migration. Cambodia’s population is highly mobile, both internally and across the region. In 2019, about 2.5 million Cambodians lived abroad, with more than 1.2 million workers going to Thailand. About 70% of these migrant workers are classified as “irregular”, of whom many cross by land on a daily or seasonal basis.12 By end-April 2020, about 95,000 migrant workers had reentered Cambodia, mainly from Thailand. Despite efforts to screen and quarantine returnees with symptoms, the risk of imported cases is high.13 Internally, up to 4.1 million people per year migrate; women outnumber men in both rural–urban and urban–urban migration, making up 57% of all migrants to Phnom Penh, and many seek employment in garment factories.14 Female migrant workers experience social and economic barriers to accessing health services, increasing the probability of poor health outcomes.15

7. Local outbreak to compound pandemic’s social and economic impacts. Before the pandemic, the economy was projected to grow by 6.8% in 2020. The growth outlook has deteriorated as the scale of the pandemic increased.16 The International Monetary Fund (IMF) World Economic Outlook forecasts a contraction of 1.6%.17 The economy is now expected to contract by 5.5% in 2020, resulting in an estimated loss of up to $7.3 billion during 2020–2021. A rise in COVID-19 cases would impose a direct cost through sickness and loss of life, and an indirect cost from measures required to control the outbreak.

8. Global pandemic impacting Cambodia’s main growth engines including tourism. GTF, tourism, and construction accounted for 43.2% of gross domestic product (GDP); for 73.9% of goods and services exported, and for 35.5% of foreign direct investment (FDI) inflows in 2019. Tourism services are projected to decline by 37.6% but a slower recovery in the second half of 2020 would lead to a larger contraction. Tourism employs 6.7% of Cambodia’s workforce with employment concentrated in the food and beverage sector (53%), transport (19.3%) and recreational activities (13.7%). Workers in these sub-sectors face job losses, reduced working hours, and extended unpaid leave.18 GTF output is projected to fall by 13.4%. As of June 2020, 121 out of 706 GTF factories have temporarily suspended operations, affecting 130,000 workers

10 As of 23 June 2020, Cambodia had tested 1,931 per 1 million people. 11 Government of Cambodia. Ministry of Health. Cambodia Response Plan for COVID-19. Phnom Penh. 12 International Organization of Migration (IOM). 2019. Assessing potential changes in the migration patterns of

Cambodian migrants and their impacts on Thailand and Cambodia. ADB-IOM consultations. 13 After 5 weeks of reporting no new cases, Cambodia recorded imported cases on 21 May 2020. 14 United Nations Educational, Scientific and Cultural Organization (UNESCO). Overview of Internal Migration in

Cambodia. Bangkok. 15 Inkochasan et. al. 2019. Access to health care for migrants in the Greater Mekong Subregion: policies and legal

frameworks and their impact on malaria control in the context of malaria elimination. WHO South-East Asia Journal of Public Health. Volume 8. Issue 1.

16 In April 2020, ADB and the World Bank projected Cambodia’s 2020 growth at 2.3%–2.5%. ADB. 2020. Asian Development Outlook. Manila; and World Bank. 2020. East Asia and Pacific Economic Update, April 2020. Washington, DC.

17 International Monetary Fund. 2020. World Economic Outlook. Washington, DC. 18 International Labor Organization. 2020. COVID-19 and employment in the tourism sector: Impact and response in

the Asia and Pacific. Geneva.

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(14% of the GTF workforce). Adverse impacts may intensify in August when the partial withdrawal of preferential duty-free access to European Union markets comes into force.19 Rapid growth of construction has been driven by foreign investment and is vulnerable to changes in investor sentiment. Construction growth is projected to slow from 19.9% to 7.7%.

9. Economic shock impacting balance of payments. Import growth slowed to 14.4% in the first quarter of 2020, the lowest level since 2018. First-quarter growth in merchandise exports slowed to 9.9%, and tourism receipts were hit by the 38.5% reduction in international visitor arrivals. Further compression of imports is expected, but the decline in tourism receipts and slower export growth will widen the current account deficit from 13.4% of GDP to 23.3%. During 2015–2019, Cambodia was able to finance a current account deficit averaging 10.2% of GDP per annum through large inflows of foreign capital. This enabled a steady build-up of reserves and import coverage. Approval of new FDI projects slowed in the first quarter of 2020, and capital inflows may prove sensitive to changes in investor sentiment linked to COVID-19. The IMF assessment letter notes that a larger and more protracted growth slowdown could put pressure on Cambodia’s fiscal position and balance of payments.20

10. Economic shock increasing finance sector risk. Lending by banks and microfinance institutions grew from 24.6% of GDP in 2009 to 94.7% in 2019. Most loans are denominated in United States dollars, and banks and microfinance institutions rely on overseas funding. The banking system has been profitable, and non-performing loans averaged a low 2.2% during 2015–2019, but vulnerabilities remain elevated. Key sources of risk are high credit concentration in construction and related property lending, and lack of consolidated cross-border supervision of foreign bank branches. The National Bank of Cambodia (NBC) has moved quickly to ensure liquidity and issued guidance on voluntary loan restructuring. As of 29 April, loans with a total value of $1.6 billion (6% of the total bank loan portfolio) had been restructured.

11. COVID-19 resulting in significant job losses. Cambodia has low rates of official unemployment (0.7% overall, 0.8% of women) but a high incidence of informal employment, which accounted for 93% of all employment in 2012.21 Informal sector workers lack access to paid or sick leave and other formal job protection. A 5.5% contraction of GDP would lead to a loss of 570,000 jobs, pushing the unemployment rate from 0.7% to 4.4%. Job losses may be particularly severe for workers in microenterprises and SMEs, which account for 98% of all businesses and for 70% of total employment.22 A survey of 284 SMEs after the COVID-19 outbreak found that 60% were considering mandatory unpaid leave, and 52% were considering retrenchments.23

12. Livelihoods of vulnerable workers at risk. Women are overrepresented among low-skilled workers and accounted for 61% of workers in manufacturing, trade, and hotels and restaurants in 2016.24 In the health sector, 52% of all workers are female, many holding lower-level positions (84% of managers are male).25 The crisis will impact young women in particular, who make up more than 80% of the GTF workforce, lack other income sources, and often remit

19 European Commission. 2020. Trade/Human Rights: withdrawal of Cambodia’s preferential access to the EU

market – Factsheet (accessed 13 May 2020). 20 International Monetary Fund Assessment Letter (accessible from the list of linked documents in Appendix 2). 21 International Labor Organization. 2012. Cambodia Labour Force and Child Labour Survey 2012: Labour Force

Report. Geneva. 22 Ministry of Industry and Handicraft. 2019. Current Situation of SMEs in Cambodia (accessed 1 May 2020). 23 Young Entrepreneurs Association of Cambodia. 2020. COVID-19: Early Impacts on Cambodian MSMEs.

Phnom Penh. 24 Government of Cambodia. 2018. National Institute of Statistics. Cambodia Inter-censal Economic Survey 2017.

Phnom Penh. 25 Source: MOH consultations.

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a portion of their earnings to families in rural areas. The crisis will also impact migrant workers and remittances from these workers are an important source of household income. The share of remittances in the income of the poorest households income increased from 3% in 2009 to 12% in 2017.26 Households with returning migrant workers now face a triple burden from reduced remittance incomes, insufficient social protection coverage, and increased risk of infection.

13. Potential reversal of recent gains in poverty reduction. Poverty will increase unless new support mechanisms are established. The income poverty rate fell from 47.8% in 2007 to 13.5% in 2014 through rapid growth in wage incomes. 27 About 2.4 million Cambodians (14.5% of the population) are currently registered in the Identification of Poor Households Programme (IDPoor). Many households are also highly indebted with personal lending expanding by 33% year on year in 2019.28 COVID-19 is likely to exacerbate the vulnerability of the poor given the limited diversification of income sources and poor access to social protection.

14. Elevated fiscal pressure as revenues sharply decline. Government revenues are projected to fall by 30.9% in 2020 relative to the pre-COVID-19 budget forecast. To ensure budget stability, the government reduced nonessential recurrent and capital expenditures by $918 million to $7.3 billion.29 An additional $475 million was allocated to support the COVID-19 response package, raising planned spending to $7.8 billion, 16% higher than 2019 levels. Budgets for healthcare and frontline services increased and resources directed for pandemic preparedness. The government’s fiscal balance is projected to worsen to -12.8% of GDP from a pre-COVID-19 forecast of -5.9% (Table 2).

Table 2: Cambodia’s Fiscal Position 2018 2019 2020

(Original)

2020 (Revised)b

2020

(Post-COVID-19) Revenuesa ($ million) 5,427 6,773 6,503 4,495 4,495 Expenditures ($ million) 5,994 6,710 8,232 7,314 7,789

Recurrent 4,019 4,250 4,893 4,548 4,973 Capital 1,975 2,460 3,339 2,767 2,817 Fiscal balance ($ million) (567) 63 (1,729) (2,819) (3,245) Fiscal balance (% GDP) (2.3) 0.2 (5.9) (10.9) (12.8)

( ) = negative, COVID-19 = coronavirus disease, GDP = gross domestic product. a Does not include grants. b Reflects budget savings made by the government as response to the expected revenue decline.

Source: Ministry of Economy and Finance and Asian Development Bank calculations.

15. Government’s comprehensive COVID-19 response. The Master Plan for COVID-19 Response is detailed and fully-costed with strong focus on health (Box 1).30 In addition, the government announced a comprehensive response program that includes fiscal stimulus

26 World Bank. 2019. Cambodia Economic Update. Phnom Penh. 27 National Institute of Statistics. 2015. Cambodia Socio-Economic Survey 2014. Phnom Penh. The national poverty

line is calculated based on food expenditure, non-food expenditure, and spending on housing and basic services. The national poverty line of KHR7,440/day in 2014 Phnom Penh prices (equivalent to $1.82 at current prices).

28 In 2017, 35.5% of all households were classified as indebted. The average outstanding loan amount was $2,370 per household, which was equivalent to 1.7 times GDP per-capita. Since 2017, interest rates on personal microfinance lending have been capped at 18.0% per annum. Government of Cambodia. 2017. Cambodia Socio-Economic Survey, 2017. Phnom Penh; National Bank of Cambodia. 2020. Annual Supervision Report, 2019. Phnom Penh.

29 The Government of Cambodia. MEF’s Budget Circular for Rationalization of Public Expenditures in Implementation of 2020 Budget. 8 April. Phnom Penh.

30 Government of Cambodia. 2020. Master Plan for COVID-19 Response. Phnom Penh. As of 21 May 2020, $60 million had been allocated to the MOH in two 6-month tranches. The World Bank pledged $34 million ($25 million for procurement for medical equipment and supplies and $9 million for technical assistance). The MEF indicated that the necessary budget may increase to $100 million.

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packages for social assistance and economic recovery (Table 3) with dedicated mechanisms to coordinate the response (Box 2). The fiscal impact of the stimulus packages will be significant given the multiplier effects from new spending. Preliminary estimates show that the $815.7 million fiscal package (3.2% of GDP) could lead to a cumulative increase in real GDP of $1.2 billion after 1 year and $1.3 billion after 2 years, equivalent to 4.3% and 4.8% of 2019 GDP, respectively.31

Box 1: Master Plan for COVID-19 Response With the WHO’s support, the government rapidly produced the Master Plan for COVID-19 Response, which was used to mobilize support from development partners. The plan aims to (i) prevent transmission and minimize disease spread and deaths; (ii) ensure availability and readiness of essential health services; and (iii) minimize impact through a multisector response to support public health and broader social and economic measures. The framework focuses on public health and includes costed actions in nine intervention areas: (i) incident management and planning; (ii) surveillance and risk assessment; (iii) laboratory; (iv) clinical management and health care services; (v) infection prevention and control; (vi) non-pharmaceutical public health measures; (vii) risk communication; (viii) points of entry; and (ix) operational logistics. Each area is categorized into short- medium-, and longer-term transmission scenarios (‘first cases’, ‘clusters of cases’, and ‘community transmission’). Each province is mandated to develop its own plan with WHO support. Implementation is supported by a wide range of international, national and subnational health and non-health stakeholders. In addition to the WHO, the United States Center for Disease Control and Prevention and Pasteur Institute are critical technical partners.

COVID-19 = coronavirus disease, WHO = World Health Organization. Source: Ministry of Health and Asian Development Bank.

Table 3: Government’s COVID-19 Response Program Program Amount ($ million) 1. Scaling Up Health Response 60.0

Prevention and detection 4.7 Clinical management and treatment 45.4 Coordination and supporting system 9.8

2. Social Assistance 300.0 Cash subsidy scheme for poor and vulnerable households 300.0

3. Economic Recovery a 455.8 Wage subsidy for garment industry and tourism workers 44.5 Loans to support small and medium-sized enterprises 150.0

Skills training and employment services 63.7 Tax relief and exemption from National Social Security Fund contributions 97.6 Cash for work program 100.0 TOTAL 815.7

a The economic recovery component includes social protection programs in support of labor market recovery e.g., wage subsidies, and skills training and employment services.

Source: Ministry of Economy and Finance.

16. Health action plan being implemented. The government closed schools and recreational venues, and suspended visa issuance to reduce the health risks. The MOH deployed 2,118 trained rapid response team members in 25 provinces for surveillance, contact tracing, and specimen collection and transfer. The cumulative number of tests carried out increased significantly from 1,100 in mid-March to more than 27,000 in mid-June 2020. To increase the chance of detection, additional COVID-19 tests are targeting high-risk groups such as migrant garment workers (of whom 80% are female) and healthcare workers (of whom 52% are female).32 The MOH deployed 250 quarantine officials and thermal imaging cameras (partially funded by an

31 Estimating the Overall Fiscal Impact of Cambodia COVID-19 Response Packages (accessible from the list of linked

documents in Appendix 2). 32 The criteria for COVID-19 testing were expanded to include samples from influenza-like illness and severe acute

respiratory syndrome. MOH Daily Surveillance Reports.

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Box 2: Institutional Arrangement for COVID-19 Response The government created four working groups under the Committee on Financial and Economic Policy tasked to review policies and monitor responses to the coronavirus disease (COVID-19): 1. Preparation of budget, financing, and social assistance policy—monitor and manage

policies and financing to (i) fight COVID-19, (ii) stabilize the livelihood of poor and vulnerable groups, and (iii) stabilize businesses.

2. Management of social assistance mechanism—identify poor households and vulnerable groups, and funding for implementation.

3. Management of supplies and prices of strategic goods—monitor daily consumption of basic foods and medical supplies, including supply chains and changes in quality and pricing.

4. Monetary and banking measures to address the consequences of the COVID-19 pandemic and the Everything But Arms (EBA) partial withdrawala—review, prepare, and track monetary and banking measures to maintain macroeconomic stability to mitigate the impacts of COVID-19.

ADB supported project)33 at border posts and international airports, and formed quarantine teams to monitor migrant movements and health. Public health information, including information targeting women, was rapidly disseminated through phone messages, social media, and community education. Major equipment including 25 ventilators (in addition to the 124 ventilators previously in country), 75 patient monitors, 10 thermal imaging cameras, and 100,000 sets of personal protective equipment was procured, including 3 million masks for garment workers and returned migrants. Minor refurbishments to establish national and subnational treatment and isolation facilities have begun.34 The MOH provides incentives for frontline health staff ($50 per day), ensures food and basic supplies for isolated patients, and covers all costs for COVID-19 related treatment for Cambodian citizens.

a Cambodia was granted duty free and quota free access to the European Union (EU) market for all products (except arms and armaments) under the EU’s Everything But Arms (EBA) scheme.

Source: Ministry of Economy and Finance.

17. The social assistance and economic recovery programs are well targeted and leverage new technologies.

(i) Increase in social assistance. The government is rolling out its cash subsidy scheme for individuals already registered in its poverty targeting IDPoor database. Currently 2.4 million individuals, or 14.5% of the population classified as poor and vulnerable will be eligible for payments under the scheme. The database is being expanded to cover additional households impacted by the crisis (Box 3).

(ii) Wage subsidy. The government announced partial wage subsidies for furloughed workers in the tourism and GTF industries for up to 4 months. In tourism, up to 50,451 workers employed by hotels, restaurants, and travel agencies will receive $40 per month with additional contributions from employers. Up to 506,082 GTF workers will receive $40 from the government and $30 from employers per month.

(iii) Enterprise loan program. To support SMEs impacted by COVID-19 (26% of which are owned by women), the government will provide low-interest loans for working capital and investment through capital injections to the newly established state-owned SME Bank and the Agricultural and Rural Development Bank.35

(iv) Skills training and employment services. Technical and soft skills training is offered for unemployed workers in the tourism and GTF industries. Longer

33 ADB. Regional: Greater Mekong Subregion Health Security Project. Manila. 34 Cambodia COVID-19 Emergency Response Project. Project Information Document (PID). The World Bank is funding

this activity through the COVID-19 Emergency Response Project. 35 Additional measures for SME longer term recovery are also planned. Loans to SMEs for investment expenditures

will be financed from government funds and/or by other development partners.

8

technical courses for non-GTF workers are also offered, including a cash incentive of $120 per month for trainees for 6 months.

(v) Tax relief for productive sectors. The government announced temporary tax exemptions for businesses amounting to $97.6 million. GTF factories that suspend operations are tax exempt till December 2020. Hotels, guesthouses, and restaurants, across 7 provinces are exempt from all taxes for up to 6 months. All airlines registered in Cambodia are also exempt from tax payments till July 2020. Manufacturers that have suspended operations are not required to pay their National Social Security Fund contributions.

(vi) Cash-for-work program for rural development and livelihood enhancement. The cash-for-work program will provide jobs in rural areas through construction, upgrade, and maintenance of rural roads, drainage and small-scale irrigation, covering 18 provinces or 83 districts and 326 communes over a 2-year period.36

Box 3: Cash Subsidy Scheme for the Poor and Vulnerable in Cambodia Currently 539,758 households, or 2.4 million individuals, are registered in the government’s IDPoor database, as extremely poor (IDPoor 1) or poor (IDPoor 2). a The government will provide monthly cash grants for 7 months until December 2020 and additional benefits for each household member and vulnerable persons, including those aged 60 years and older, persons with disabilities, children under 5, and persons with HIV.

Basis of Cash Subsidy Support IDPoor 1 ($) IDPoor 2 ($) Urban Rural Urban Rural 1. Flat rate per household 30 20 30 20 2. Support for each member 10 6 7 4 3. Per each child 0–5 years 10 6 7 4 4. Per each person with disability 10 6 7 4 5. Per each person aged 60 years and older 10 6 7 4

Households and individuals adversely affected by the crisis, or the new poor, will be included in the expanded data base, using the existing “On-Demand” IDPoor mechanism of registering households that slip below the poverty line in between the regular 3-year poverty identification rounds.b Mechanisms for beneficiary registration, payments, communications, and grievance redress are also being strengthened.

HIV = human immunodeficiency virus, IDPoor = Identification of Poor Households Programme. a IDPoor targeting and eligibility is based on household assessments through a standardized survey questionnaire

combined with village-level discussions. b Implementation is being supported by a number of development partners including UN agencies. Source: Ministry of Planning and Asian Development Bank.

18. Coordinated monetary and finance sector response. Although limited by de facto dollarization, the NBC acted quickly to manage finance sector risks and maintain liquidity. First, it lowered the reserve requirements for riel deposits from 8% to 7%, and from 12.5% to 7% for dollar deposits. Second, the planned additional increases in the Capital Conservation Buffer for banks were delayed until 2021.37 Third, it cut the interest rate for liquidity-providing collateralized operations, thus decreasing banks’ funding costs in domestic currency and reduced the interest rate on Negotiable Certificates of Deposit to encourage banks to disburse loans.38 Finally, the NBC issued a directive on the restructuring of loans where repayment capacity had been impacted by COVID-19.

36 Cash-for-work program will be financed from government funds and/or by other development partners. 37 The capital conservation buffer requires financial institutions build up buffers of equity and retained earnings that can

be drawn down in case of losses. 38 The NBC established the liquidity-providing collateralized operations facility to set a benchmark rate for local currency

borrowing for the market.

9

19. Lessons learned. ADB’s long-term engagement in Cambodia highlights the need for in-depth policy dialogue to ensure inclusive and sustainable development. Key lessons for ADB’s COVID-19 response include: (i) supporting the government to effectively lead the emergency response and economic recovery program; and (ii) focusing on the core medium- to long-term drivers of Cambodia’s development, including through regional cooperation and integration, despite the COVID-19 health shock.39 Cambodia’s role in regional cooperation to manage transboundary health risks and rebuild regional value chains is key to its longer-term recovery.40 The CARES Program enables a timely and comprehensive response to stabilize the economy but further ADB support will be instrumental in strengthening the existing systems and institutions, improving governance, and preparing the economy for recovery.

B. Proposed Program, Impacts and ADB’s Value Addition

20. The CARES Program will provide budgetary support to address critical health risks and manage the macroeconomic impacts of COVID-19 through the implementation of countercyclical measures. The program is aligned with ADB’s Strategy 2030 operational priorities (OPs) on addressing remaining poverty and reducing inequalities (OP1), accelerating progress in gender equality (OP2), strengthening governance and institutional capacity (OP6), and fostering regional cooperation and integration (OP7). The impact of the CARES Program will be that the transmission of COVID-19 has been controlled and that its adverse health, economic, and social impacts on the population have been mitigated. The outcome will be that the COVID-19 outbreak is effectively managed and its immediate adverse social and economic effects are reduced. The three outputs are as follows: (i) health measures to combat the spread of COVID-19 supported; (ii) resources dedicated to social assistance disbursed and relief for affected people implemented; and (iii) economic stimulus package for adversely impacted sectors delivered.

21. ADB value addition. ADB’s long-term engagement with the Government of Cambodia on policy reforms and institutional strengthening is instrumental to the next phase of support for the COVID-19 response. The CARES Program builds on the rapid assistance provided through existing projects and is linked to a robust forward pipeline of investment projects and technical assistance (TA). ADB utilized the GMS Health Security Project41 for the emergency procurement of temperature-screening equipment at international checkpoints and to finalize the MOH’s Gender Strategic Plan 2019–2023.42 ADB also supported the MOH website, which hosts the daily COVID-19 surveillance report; the “115” phone hotline, which provides counselling and referral services for gender-based violence victims; and a broader mapping of resources for outbreak response.43 ADB will procure personal protective equipment to fill supply gaps.44 ADB also undertook a joint economic analysis with the MEF to model the impact of COVID-19 on public finances and debt, and provided early advisory support on the economic recovery program.

22. Future support. The Policy Advice for COVID-19 Economic Recovery TA45 will support implementation of the CARES Program and formulation of an economic recovery plan. ADB’s

39 ADB. Cambodia Validation of the Country Partnership Strategy Final Review, 2014–2018. September 2019. Manila. 40 Cambodia’s connectivity in the region highlights that improvements in infrastructure, transport, and logistics could

further support growth and recovery. 41 ADB. Regional: Greater Mekong Subregion Health Security Project. Manila. 42 Ministry of Health. Communicable Disease Control Department. Manila. 43 ADB 2018. High Level Technology Solutions for Communicable Disease Control in the Greater Mekong Subregion.

Manila. 44 ADB. 2020. Major Change in Technical Assistance: Regional Support to Address the Outbreak of Coronavirus

Disease 2019 and Potential Outbreaks of Other Communicable Diseases. Manila. 45 ADB. 2020. Technical Assistance for Policy Advice for COVID-19 Economic Recovery in Southeast Asia. Manila.

10

indicative support program for 2020–2023 includes several other projects that complement the CARES Program. ADB will continue to support public financial management (PFM) reforms for improved governance. In the health sector ADB is preparing an innovative regional project to improve migrant workers’ access to affordable health services, for approval in 2021. This project aligns with the goal of reaching region-wide universal health coverage and strengthening regional health cooperation. On social protection, ADB will support piloting of digital technologies for improved identification and enrollment of beneficiaries to strengthen the monitoring of service delivery.46 ADB is providing advisory support and capacity development to the National Social Protection Secretariat to develop a social budgeting forecasting system. On economic recovery, ADB’s 2020 program includes loan financed projects to support agribusiness development and improve the efficiency and reliability of power services; and a grant to help revive tourism in heritage areas. The forward pipeline includes support to agri-value chains, fisheries, and livestock development. ADB will continue to support finance sector development and policy dialogue to support trade integration and economic competitiveness.

C. Development Financing Needs, Budget Support and Debt Sustainability

23. The government’s financing needs have doubled from $1.7 billion to $3.5 billion. It plans to meet the additional financing requirements through external concessional borrowing and drawing on its cash reserves as needed (Table 4).47

Table 4: Financing Needs ($ million) Item 2020 (before

COVID-19) 2020 (adjusted for COVID-19)

Change (%)

Total financing requirement 1,729 3,544 105.0 Domestic financing 234 1,309 459.4 Foreign financing 1,495 2,235 49.5 Grants 277 277 - Concessional borrowinga 1,218 1,958 60.8

- of which project lending 1,198 1,198 - of which budget support 20 760

ADB CARES Program (CPRO) - 250 - ADB DPSFM II

World Bank 20 20

150 -

Other Development Partners (TBD) - 340 - ADB = Asian Development Bank, CARES = COVID-19 Active Response and Expenditure Support, COVID-19 = coronavirus disease, CPRO = COVID-19 pandemic response option, DPSFM II = Second Decentralized Public Service and Financial Management Sector Development Program, TBD = to be determined. a ADB’s portfolio in 2020 excluding planned budget support will amount to $214 million which consists of project lending

and grants. Source: Asian Development Bank calculations.

24. The government has requested a concessional loan of $250 million from ADB’s ordinary capital resources, to help finance the pandemic response and countercyclical support expenditure needs. The CARES Program will be funded by $250 million of concessional ordinary capital lending comprising $58.7 million from performance-based country allocation, $113.5 million from the Disaster Response Facility, $30.0 million from regional cooperation integration, and $47.8 million from region-wide reprogramming and savings. The loan will have a 24-year term, including a grace period of 8 years, with an interest charge at the rate of 1.0% per annum during

46 ADB. Kingdom of Cambodia. Supporting Digital Cambodia for Inclusive Development Project (forthcoming). Manila. 47 The government will need to draw on cash reserves to meet any shortfalls in financing needs in the short term.

Longer term, to expand its domestic financing options, the government plans to expedite its debt securities program to 2020–2021 to enable it to issue domestic bonds as an additional source of domestic financing.

11

the grace period and 1.5% per annum thereafter; for a term of 24 years; and such other terms and conditions set forth in the draft loan agreement. The loan is expected to be disbursed in July 2020 in a single tranche. The loan size is based on Cambodia’s financing needs.

25. Debt sustainability. ADB’s assessment concluded that public debt in Cambodia will stay moderately low in the medium term.48 The additional debt of $250 million under the proposed CARES Program represents 3.2% of outstanding public debt stock and 0.9% of 2019 GDP and will not significantly affect the overall debt ratio nor the annual debt service obligations. Worsening fiscal deficits are expected to drive the total external debt ratio up to 39.9% of GDP in 2020–2021, which is assessed as moderate and not at risk to sustainability.49 The most recent IMF–World Bank Debt Sustainability Assessment also found that Cambodia is at low risk of debt distress.50

D. Development Partner Coordination

26. The government has played an active role in coordinating development partner support through the Master Plan for COVID-19 Response and the four working groups (Box 2).51 For health, the WHO provides coordination and procurement support. The World Bank is supporting health infrastructure and the provision of medical equipment. United Nations agencies and bilateral donors support capacity building and the procurement of supplies. Several partners are supporting the implementation of the cash subsidy scheme. ADB, as co-chair of the development partners group, led coordination on behalf of the group with the MEF on the COVID-19 committee tasked with the preparation of budget, financing, and social assistance policy. In addition, ADB coordinated with the IMF to obtain its assessment of the impact of COVID-19 on the public finances and debt sustainability.52 The MEF has requested other development partners to draw on ADB’s in depth assessments for the CARES Program for their own programs. At the request of the government, Agence Française de Développement and the Japan International Cooperation Agency indicated interest in cofinancing and alignment with the CARES Program. The World Bank is also planning to provide budget support to the government for $150 million.

E. Implementation Arrangements

27. The MEF will be the executing agency for the CARES Program. To support effective implementation and longer-term recovery, a country engagement framework was established between ADB and the government.53 The framework includes a policy committee responsible for quarterly reporting on the progress of the government’s countercyclical and health response, including progress made against the gender monitoring matrix targets and the periodic collection of sex-disaggregated data on program beneficiaries. Three sub-committees will facilitate the engagement with the private sector, civil society organizations, and entities that focus on big data analytics to drive innovative approaches based on the latest available data.54 ADB will provide TA support to help with program implementation and monitoring (footnote 45). The program implementation period is July 2020–June 2021. The proceeds of the loan will be withdrawn in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time).

48 Debt Sustainability Assessment (accessible from the list of linked documents in Appendix 2). 49 This reflects a scenario in which the deficit is fully financed with new borrowing, rather through a combination of new

borrowing, and drawdown of existing reserves. 50 IMF. 2019. Cambodia: 2019 Article IV Consultation—Press Release; and Staff Report. IMF Country Report.

No. 19/387. Washington, DC. 51 Development Coordination (accessible from the list of linked documents in Appendix 2). 52 International Monetary Fund Assessment Letter (accessible from the list of linked documents in Appendix 2). 53 Country Engagement Framework for COVID-19 Response to Cambodia (accessible from the list of linked documents

in Appendix 2). 54 The government representatives on the (sub)committees will include officials from the MEF and other ministries.

12

III. DUE DILIGENCE

28. Governance. The 2015 Public Expenditure and Financial Accountability indicators showed an improvement in aggregate fiscal discipline, and monitoring and reporting of budget execution.55 Some slippage was noted in indicators related to resource allocation and delayed in-year budget execution reports. There is also substantial inherent financial management risk. However, ADB’s sector work underpins investments in improving PFM systems. ADB support to PFM reforms has been closely aligned to the government’s multistage approach under the four-stage Public Financial Management Reform Program 2004–2025.56 Notable achievements are: (i) strong performance in revenue mobilization; (ii) implementation of a financial management information system; and (iii) introduction of program budgeting across government. During 2018–2019 the government adopted strategies between 2018 and 2019 strengthen planning, budgeting investment management, procurement, and revenue mobilization.57 ADB is supporting improved operational efficiency, adoption of integrated financial management systems, strengthening of budgeting and tracking of resources, and better debt management.

29. Poverty and social. Cambodia’s gains in poverty reduction are now at risk of a setback because of COVID-19. The poor are more vulnerable to public health risks, and COVID-19 will have a significant impact on labor market outcomes. It is estimated that 205,000 poor and vulnerable workers could fall below the extreme poverty line due to COVID-19, while more than 1.1 million currently living just above the poverty line are susceptible to falling into moderate poverty.58 Household expenditures to meet healthcare needs may lead to further impoverishment. The CARES Program is therefore pivotal in ensuring that the government can meet its critical social expenditures to safeguard the gains made in reducing poverty and inequality.

30. Gender. The CARES Program is categorized as effective gender mainstreaming. COVID-19 is increasing women’s vulnerability to domestic and gender-based violence, lost income, infection, social exclusion because of mobility restrictions, loss of employment, and increased family care roles. The government’s information, education, and communication materials are delivering gender-sensitive messages on transmission prevention, personal hygiene, and support for people experiencing gender-based violence. The CARES Program supports women’s welfare through four key channels. First, COVID-19 testing targets high-risk groups such as garment workers (of whom 80% are female) and health care workers (of whom 52% are female). Second, the government will expand the IDPoor program to deliver cash subsidies to more than 2.4 million poor and vulnerable people, of which 50% are women, while maintaining existing cash transfers for pregnant women and infants through the first 2 years of life. Third, the government will offer wage subsidies to workers in the hardest hit sectors of the economy, including GTF. Finally, the government also offered tax exemptions and favorable loan conditions to support struggling businesses including SMEs, of which 26% are owned by women.

31. Safeguards. In compliance with ADB’s Safeguard Policy Statement (2009), the program is classified category C for environment, involuntary resettlement, and indigenous people. The program is not expected to have any environmental or social safeguards impacts within the meaning of the Safeguard Policy Statement (2009).

55 Government of Cambodia. 2015. Report of the Evaluation on The Public Financial Management System of

Cambodia. Phnom Penh. 56 Government of Cambodia. 2015. Public Finance Management Reform Program. Phnom Penh. 57 This includes the following strategic documents: (i) budget system reform strategy 2018–2025; (ii) budget system

reform strategy for subnational administrations 2018−2025; (iii) revenue mobilization strategy 2019−2023; (iv) public investment management strategy 2019−2023; and (v) a public procurement reform strategy 2019−2023.

58 Employment and Poverty Impact of COVID-19 (accessible from the list of linked documents in Appendix 2).

13

32. Risks and mitigating measures. Major risks and mitigating measures are summarized in the table and described in detail in the risk assessment and risk management plan.59 ADB’s Anticorruption Policy (1998, as amended to date) was discussed with the government.

Table 5: Summary of Risks and Mitigating Measures Risks Mitigation Measures Outbreak escalation with subsequent waves of infections, including increases in undetected cases in the country

The Master Plan for COVID-19 Response includes scenario-based planning, including community transmission aligned with WHO’s technical advice. ADB is providing TA and program support, including regional knowledge exchange.

Global and national economic conditions worsen further reducing demand in key sectors

The government has put in place comprehensive measures to respond to the expected economic downturn through its countercyclical fiscal response.

Gaps in technical capacity limit the ability of government agencies to implement the COVID-19 pandemic response effectively

ADB support to strengthen program management includes implementation support through TA and project implementation units. The government established working groups for an overall coordinated response. Quarterly reporting on implementation through country engagement framework will be supported by TA resources.a

Weaknesses in PFM (audits and internal control mechanisms) limit the government’s ability to effectively implement responses

ADB is a long-term partner in strengthening PFM systems and providing TA to line ministries on the FMIS rollout. ADB is assisting the government in its multistage PFM reform program, which includes improved budgeting, debt management, and expenditure tracking; and strengthening PFM systems nationally and at subnational level.

ADB = Asian Development Bank, COVID 19 = coronavirus disease, FMIS = Financial Management Information System PFM = public financial management, TA = technical assistance, WHO = World Health Organization. a ADB. 2020. Technical Assistance for Policy Advice for COVID-19 Economic Recovery in Southeast Asia. Manila. Source: Asian Development Bank.

IV. ASSURANCES

33. The government and the MEF have assured ADB that implementation of the program shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the loan documents.

V. RECOMMENDATION

34. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan of $250,000,000 to the Kingdom of Cambodia for the COVID-19 Active Response and Expenditure Support Program, from ADB’s ordinary capital resources, on concessional terms, with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; for a term of 24 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board.

Masatsugu Asakawa President

26 June 2020

59 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

14 Appendix 1

DESIGN AND MONITORING FRAMEWORK Country’s Overarching Development Objectives Transmission of COVID-19 controlled and its adverse health, economic and social impacts on the population mitigated (Master Plan for COVID-19 Response).a

Results Chain Performance Indicators with Targets and

Baselines

Data Sources and Reporting

Mechanisms Risks

Effect of the Program COVID-19 outbreak effectively managed and its immediate adverse social and economic effects reducedb

a. By December 2021, Cambodia’s preparedness capacity, assessed by the operational readiness index,c increased by at least 10% to 52% or more (2018 baseline: 42%)

b. By December 2020, monthly cash grants received by at least 80% of the poor and vulnerable people through the IDPoor database (with at least 50% women beneficiaries) (January 2020 baseline: 2.4 million individuals registered on IDPoor database)

c. By June 2021, at least 70% of SMEs that received working capital support are still in business by June 2021, of which 26% are owned by women (January 2020 baseline: 0 SME’s receiving support under government scheme)

a. State Parties self-assessment annual reporting tool,d MOH

b. MOP annual IDPoor report and development partner report, e.g., GIZ annual report on IDPoor

c. General Department of Taxation quarterly reports; tax filings

Outbreak escalation with subsequent waves of infections, including increases in undetected cases in the country Global and national economic conditions worsen beyond projections, further reducing demand in key sectors

Outputs 1. Health

measures to combat the spread of COVID-19 supported

1.1 By December 2020, testing policies target migrant workers and test results for all samples are reported to health facilities within 48 hours, with test data disaggregated by sex (January 2020 baseline: 0 testing policies targeting migrants and over 48 hours for sample reporting time)

1.2 By December 2020, in addition to COVID-19 tests, 2,000 influenza-like illness and severe acute respiratory syndrome samples are tested for COVID-19, targeting high-risk groups such as garment workers (of whom 80% are women) and healthcare workers (of whom 52% are women) (November 2019 baseline: not applicable)e

1.3 Between February 2020 and December 2020, 100% of COVID-19 patientsf admitted for inpatient treatment incur no out-of-pocket expenses, with data disaggregated by sex (January 2020 baseline: not applicable)

1.1 Quarterly MOH surveillance reports

1.2 Quarterly MOH reports

1.3 Annual MOH reports

Gaps in technical capacity limit the ability of government agencies to implement the COVID-19 pandemic response effectively

2. Resources dedicated to social

2.1 By December 2020, at least 210,000 new individuals are registered in the IDPoor database and eligible for cash subsidy

2.1 MOP annual report, annual IDPoor report

Appendix 1 15

Results Chain Performance Indicators with Targets and

Baselines

Data Sources and Reporting

Mechanisms Risks

assistance disbursed and relief for affected people implemented

3. Economic

stimulus package for adversely impacted sectors delivered

payments (of which at least 50% are women) (January 2020 baseline: 2.4 million individuals registered and included in IDPoor database)

2.2 By December 2020, payments are differentiated by household composition and at least 182,000 children (under 5 years) and 270,000 elderly people (over 60 years) currently registered on IDPoor received payments from the cash subsidy scheme (with at least 50% female beneficiaries) (May 2020 baseline: 181,269 under 5s and 267,056 over 60s registered)

3.1 By June 2021, at least 200 impacted firms in the GTF and tourism industries receive a package of tax relief and suspended NSSF contributions for 20,000 workers of which at least 65% are women beneficiaries. (January 2020 baseline: 0 firms receiving tax relief)

3.2 By December 2020, of the government’s $44.5 million wage subsidy support program to the hardest hit sectors, at least 112,500 of the estimated 150,000 beneficiaries from the GTF sector will be female workers. (January 2020 baseline: 0 workers received wage subsidies)

3.3 By June 2021, women represent at least 20% of total borrowers of working capital loans from the SME Bank. (January 2020 baseline: 0 women registered, SME Bank only just established)

2.2 MOP annual report, annual IDPoor report

3.1 MEF reports, quarterly General Department of Taxation report

3.2 Ministry of Labour and Vocational Training annual report

3.3 National Bank of Cambodia annual reports on borrower numbers

Budget Support Asian Development Bank: $250,000,000 (loan)

COVID-19 = coronavirus disease, GIZ = Deutsche Gesellschaft für Internationale Zusammenarbeit, GTF = garments, textiles and footwear, IDPoor = Identification of Poor Households Programme, MEF = Ministry of Economy and Finance, MOH = Ministry of Health, MOP = Ministry of Planning, NSSF = National Social Security Fund, SMEs = small and medium-sized enterprises. a Government of Cambodia. 2020. Master Plan for COVID-19 Response. Phnom Penh. b Given uncertainties about how the pandemic and its economic effects may unfold, government responses need to be

flexible to address the evolving situation. Because new data collection and reporting systems to monitor the crisis are being developed and evolving, it is not yet possible to set more specific program targets than those presented in the design monitoring framework. Additional indicators to measure the effects of the program may be identified at a later stage and used to report on the program’s effectiveness as comprehensively as possible in the program completion report.

c The index is calculated by taking the average percentage score of 18 capacity areas. Health security capacities in the context of COVID-19 outbreak: an analysis of International Health Regulations annual report data from 182 countries.

d WHO will assist to collect information using the Electronic State Parties Self-Assessment Annual Reporting Tool. e Government has traced back to December 2019 to test samples. f Applicable to Cambodian citizens only. Source: Asian Development Bank.

16 Appendix 2

LIST OF LINKED DOCUMENTS

http://www.adb.org/Documents/RRPs/?id=54195-001-3

1. Loan Agreement

2. Sector Assessment (Summary): Health

3. Development Coordination

4. Country Economic Indicators

5. International Monetary Fund Assessment Letter

6. Summary Poverty Reduction and Social Strategy

7. Risk Assessment and Risk Management Plan

8. List of Ineligible Items

9. Debt Sustainability Analysis

10. Gender Monitoring Matrix

Supplementary Documents

11. Employment and Poverty Impact Assessment: Cambodia

12. Regional Cooperation and Integration Assessment Summary

13. Country Engagement Framework for COVID-19 Response to Cambodia

14. Estimating the Overall Fiscal Impact of Cambodia COVID-19 Response Package

15. Summary of Strategies Related to COVID-19

16. Summary Cross-Country Comparison of COVID-19 Related Data and Effects

Appendix 3 17

DEVELOPMENT POLICY LETTER

18 Appendix 3

Appendix 3 19

20 Appendix 4

ASSESSMENT OF COMPLIANCE WITH THE COUNTERCYCLICAL SUPPORT FACILTY ACCESS CRITERIA Access Criteria ADB Staff Assessment

1. Adverse Impact of Exogenous Shocks

Cambodia faces severe impacts from the COVID-19 pandemic. While initial health impacts have been limited, its weak health systems would easily be overwhelmed by a surge in cases. Cambodia is highly exposed to negative economic impacts from the pandemic due to its (i) high degree of openness; (ii) narrow economic base; (iii) highly leveraged and dollarized financial sector; and (iv) large current account deficit. Impact on production, employment, and welfare. The COVID-19 pandemic is already having a large negative impact on the economy. The immediate impacts on the real economy are concentrated in three key sectors: (i) leisure and tourism related services; (ii) GTF; and (iii) construction and real estate. These sectors accounted for almost half of GDP, three quarters of exports, and two thirds of GDP growth in 2019. Services related to leisure and tourism have been impacted by the sharp decline in international visitor arrivals, government policies to promote social distancing, and reduced domestic demand. GTF are primarily exported to advanced economies. Production was initially interrupted by shortages of raw materials from the People’s Republic of China. These bottlenecks have been resolved but the sector is now being hit by a collapse in export demand. Construction activity has boomed in recent years. Most major construction projects are financed by FDI inflows and many property developments are marketed to non-resident buyers. Bank lending for construction and real estate activity has also grown rapidly, rising from 10.8% of GDP in 2011 to 35.4% of GDP in 2019. Construction activity has been concentrated in Phnom Penh and Sihanoukville, and market analysis shows that the supply of retail, office, and high-end residential accommodation is set to increase significantly in 2020 as ongoing projects are completed. The construction and real estate sector is exposed to changes in investor sentiment related to the pandemic and the downturn in global growth. A sharp downturn in the local property markets may have impact on growth and put pressure on banks that have lent to the sector. The direct impact of the pandemic on GTF, tourism, and construction and real estate will spill over to the rest of the economy. Prior to COVID-19, the economy was expected to grow by 6.8% in 2020 and 6.7% in 2021. Independent growth forecasts for 2020–2021 were published by ADB, the World Bank, and IMF during March–April 2020 at a time when the global impacts of the pandemic were still emerging. The World Bank initially projected growth of 2.5% in 2020, followed by 5.9% in 2021. In April, ADB forecast growth of 2.3% in 2020 and 5.7% in 2021. The IMF projected a contraction of 1.6% in 2020 and growth of 6.1% in 2021. The global outlook has continued to deteriorate since the IMF’s forecasts were published and the prospect of a very rapid recovery in the second half of 2020 has faded. ADB staff undertook a joint modelling exercise with Cambodia’s Ministry of Economy and Finance to assess the likely macroeconomic impacts of the pandemic. This exercise highlighted the extent of the downside risks to Cambodia’s growth outlook due to COVID-19. Under the revised growth projection in ADB’s Asian Development Outlook Supplement (June 2020), the economy is now projected to contract by 5.5% in 2020 before rebounding with growth of 5.9% in 2021. The 2020 projection is based on 37.6% (year-on-year) decline in tourism related activities, a 13.4% (year-on-year) decline in GTF production, and a slowdown in construction and real estate growth to 7.7% (year-on-year). The pandemic will impact on sectors where formal employment is prevalent, such as GTF, and sectors where informality is more common such as construction, trade, hotels, and restaurants. Employment impacts were estimated by applying sector point elasticities for employment with respect to GDP to the projected GDP growth rate. This analysis showed that a contraction

Appendix 4 21

Access Criteria ADB Staff Assessment in GDP of 5.5% could lead to 570,000 job losses in 2020 of which 345,000 people would become unemployed raising the unemployment rate from 0.7% in 2019 to 4.4% in 2020 and 225,000 people would move to less productive jobs. An additional 25,000 workers, or 5%, would drop out of the labor force altogether, while up to 200,000 or approximately 35% would shift to lower productivity, lower pay sectors, mainly in agriculture, but also in wholesale and retail trade and other sectors. This would result in an increase in the working poverty rate, or proportion of the employed whose employment-related incomes are not sufficient to lift them and their families out of poverty. The impact of COVID-19 on employment and remittances could reverse recent gains in poverty reduction. The national poverty rate decreased from 47.8% in 2007 to 13.5% in 2014. Updated poverty estimates using more recent data are yet to be published, but a projection of past trends suggests that headcount poverty rates continued to fall during 2015–2019. An initial estimate using data on working poverty found that with an economic contraction of 5.5% of GDP in 2020, 1.1 million people would fall into moderate poverty and 205,000 workers could fall into extreme poverty.a Overall, the impact of the pandemic would be an increase in the estimated share of workers in extreme and moderate poverty in 2020 from an estimated 28% under the baseline scenario, to 44%, reversing important achievements in terms of poverty reduction over the past decade. Fiscal impacts. COVID-19 is expected to lead to a large decline in domestic revenue collection as result of reductions in the tax base, reduced corporate and personal income, reduced imports, and lower consumption of luxury goods. Domestic revenues were forecast by considering recent revenue performance and information from taxpayer filings during Q1 2020. Under the updated baseline scenario, domestic revenues are projected to decline by 30.9% (year-on-year) in 2020 pushing the overall fiscal balance to -12.8% of GDP (including grants) compared to a pre-COVID-19 forecast of -5.9% of GDP. Money and banking. Cambodia has a high level of de-facto dollarization. The USD-KHR exchange rate has remained stable during 2020 but a large share of banking deposits and lending is USD denominated. Lending by banks and microfinance institutions has grown rapidly in recent years, with total private sector credit rising from 24.6% of GDP in 2009 to 95.3% in 2019. Most commercial banks are foreign branches or subsidiaries. The banking system has been profitable and has maintained low levels of non-performing loans. However, the most recent IMF Article IV assessment noted that vulnerabilities remain elevated. Key sources of risk include high credit concentration, related party lending risks, lack of consolidated cross-border supervision for foreign banks, and risks related to unregulated lending by real estate developers. Low liquidity is also an important source of risk with financial institutions, which continue to draw on funding from abroad, including from parent banks and financial institutions with development purposes such as MFIs. The impact of COVID-19 on the real sector will make it harder for some private borrowers to service their loans. The NBC issued guidance to banks and microfinance institutions on 27 March to enable voluntary loan restructuring. In the first 4 weeks after this guidance was issued, 18,000 loans, totaling approximately $1.6 billion, or 6% of all bank lending were restructured. Voluntary restructuring of loans will help to avoid a sudden spike in non-performing loans and impairment of bank and MFI’s loan assets and balance sheets. However, given the reliance on external wholesale financing, some banks and MFIs may face a mismatch between the time profile of their assets and liabilities. Dollarization limits the ability of NBC to serve as a lender of last resort by providing liquidity to banks and MFIs.

22 Appendix 4

Access Criteria ADB Staff Assessment Balance of payments. Cambodia has a long-standing current account deficit due to imbalances in merchandise trade and remittances of profits that are not fully covered by tourism receipts, and other service credits. The current account deficit averaged 10.2% of GDP during 2015–2019. Cambodia has been able to fund this deficit through large capital inflows that enabled a build up of international reserves from 5.7 months of import cover in 2015 to 8.8 months in 2019. COVID-19 will lead to a widening of the current account deficit and may put pressure on the balance of payments. Prior to COVID-19, the current account balance was projected at -13.6% of GDP in 2020 and 13.4% of GDP 2021. While some compression of imports is expected due to COVID-19, this will be outweighed by the reduction in merchandise exports, tourism receipts, and remittances. The most recent projection from the IMF is for the current account deficit to widen to -22.2% of GDP in 2020, before recovering modestly to -17.6% in 2021. The updated baseline scenario prepared by ADB projects a current account balance of -23.3% of GDP in 2020 and 17.9% in 2021. Cambodia has seen large increases in FDI and other financing flows since 2018. FDI and other financing inflows are expected to remain strong during 2020–2021 as implementation of approved FDI projects moves forward thus cushioning the impact of the deterioration of the current account. The IMF’s latest forecast is for official reserves and import cover to decline slightly, to the equivalent of 8 months of import cover. However, there is a clear risk of a sharper slowdown in capital inflows due to slower implementation of ongoing FDI projects, reduced approval of new projects and shifts in investor sentiment. Such a slowdown would put pressure on reserves and could ultimately force much more severe import compression. Health impact. As of 23 June 2020, Cambodia has reported 130 cases (90 men, 39 women, 1 unknown) of COVID-19 (127 recovered and 3 cases undergoing treatment) and no deaths. However, there is a high likelihood that current confirmed cases under-report the true incidence of infections. As of 23 June 2020, Cambodia has only tested approximately 32,281 specimens, equating approximately 0.2% of the population, or 1,931 tests per 1 million people. Only two laboratories in the country are capable of undertaking molecular testing for COVID-19, with a maximum testing capacity of 900 samples a day. At a time when countries globally are ramping up their testing capabilities, Cambodia did not report a single new case between 12 April and 20 May 2020, suggesting daily testing numbers have not been sufficiently increasing. In Cambodia, the Pasteur Institute advises that while there is no ‘gold standard’ for testing, increasing testing capacity at provincial level and rural areas, expanding epidemiological criteria, carrying out more contact tracing, and targeting vulnerable populations like migrant workers and women would better ensure the timely detection and containment of COVID-19. Only 22% of individuals in rapid response teams are women, which may make detecting COVID-19 among women and children more challenging. The MOH and WHO have warned that Cambodia faces high likelihood of a second outbreak and would not be able to cope with surges and subsequent mortality. Deficiencies in prevention, detection, and response capacity, particularly at the subnational level, undermine the country’s operational readiness to counter COVID-19. In terms of preparedness for outbreaks, Cambodia is currently classified as ‘level 3’ (of 5) ready, signifying that they are less than 60% prepared. National capacity for health emergency coordination is hampered by weak provincial mechanisms for incident management and emergency operations – most referral hospitals do not have triage departments. At community-level, awareness of COVID-19 is low and healthcare workers, particularly women, require training in clinical management. Inadequate systems for transferring specimens to national COVID-19 testing laboratories exacerbate the limitations in the country’s diagnostic capabilities. Women

Appendix 4 23

Access Criteria ADB Staff Assessment hold lower-level roles in the healthcare sector, with 84% of managers being men, which decreases the ability to provide gender-balanced service delivery.

2. Countercyclical Development Expenditures

Summary. The government has formulated a comprehensive pandemic response master plan. The health response is presented in a detailed and fully costed Master Plan for COVID-19 Response that was prepared with support from the WHO. Four high-level working groups have been established to coordinate measures to minimize socio-economic impacts. The government has prepared a strong countercyclical support program of $815.7 million comprising: new expenditures on healthcare for $60.0 million, social protection of $300.0 million, and economic measures including $150.0 million for loans to SMEs, $44.5 million for wage subsidies and $97.6 million for tax relief for businesses in the sectors that have been most impacted by COVID-19. Health response. The initial budget for COVID-19 health response has been set at $60.0 million. The budget will support implementation of the Master Plan for COVID-19 Response, prioritizing spending on medical equipment, health facilities, and incentives for health workers. Social transfer payments. $300 million is budgeted for the cash subsidy scheme to poor and vulnerable households. The government’s IDPoor registry is being used as the foundation for this program. IDPoor was established in 2011 as a mechanism for identifying poor and vulnerable households. Around 14.5% of all households are currently enrolled in the registry. The program uses village-level enrollment based on a multi-dimensional poverty measure. Households that are evaluated as ‘extremely poor’ are classified as IDPoor 1, while households evaluated as ‘poor’ are classified as IDPoor 2. Most households in the program are in rural areas. The program registration also identifies vulnerable household members including persons with disabilities, young children, and pensioners. Cash transfers will be paid to households that are already registered in IDPoor, and registration will be expanded to cover households and individuals who are experiencing economic distress due to COVID-19. Wage subsidies. The government announced partial wage subsidies for furloughed workers in the tourism and GTF industries for up to 4 months. In tourism, 50,451 workers employed by hotels, restaurants, and travel agencies will receive $40 per month with additional contributions from employers. An estimated 506,082 workers in GTF companies will receive $40 from the government and $30 from employers. SME financing. The government has budgeted $100 million from the national budget to a newly established ‘SME Bank’. This state-owned bank is expected to work with existing BFIs to enhance SME access to credit. The SME bank was established as of January 2020 and could become a conduit for on-lending of government funds to private BFIs. The government has also announced an additional $50 million transfer to the state-owned Rural and Agricultural Development Bank that would support lending to agribusiness firms that have been impacted by COVID-19. Tax relief. The government has announced temporary tax exemptions for businesses in the manufacturing, tourism, and aviation sector to support businesses that have been affected by the slowdown in visitor arrivals and physical distancing policies. Garment factories are also tax exempt until December 2020. Hotels, guesthouses, and restaurants across 7 provinces key to tourism are exempt from all monthly taxes for up to 6 months. All airlines registered in Cambodia are also exempt from

24 Appendix 4

Access Criteria ADB Staff Assessment tax payments until July 2020. Manufacturers that have suspended operations are not required to pay their National Social Security Fund contributions.

3. Pre-shock Record of Generally Sound Macroeconomic Management

A strong track-record. The IMF assessment letter provides at pre-shock outlook with growth projected at 6.8% for 2020, supported by strong external demand and continued high levels of foreign investment. Overall, Cambodia has a strong pre-shock record of sound macroeconomic management. The 2019 Article IV Staff Report (IMF Country Report No.19/387) also noted ongoing progress toward development goals, including strong progress made on revenue mobilization and prudent fiscal management. The assessment did note that the external position is weakened by risks from rapid credit growth, especially in the real estate sector. Growth and inflation. Cambodia was one of the fastest growing countries in the world over the past two decades, growing by an average of 8.0% per annum during 1999-2019. The economy grew by an average of 7.1% per annum during 2015–2019, and inflation averaged 2.5%. Growth has been supported by high levels of FDI, strong export performance, and rising domestic consumption. Growth has been inclusive and has produced large reductions in poverty, which fell from 50.2% in 2003, to 13.5% in 2014 the last year for which official statistics are available. Price stability has been aided by relatively high levels of de-facto dollarization. Prior to the COVID-19 pandemic, the economy was projected to grow at an average rate of 6.8% per annum during 2020–2021. Balance of payments. Cambodia has an open economy and has steadily increased its integration into the international economy through trade, investment, and migration. Merchandise exports have grown rapidly and increased by an average of

12.6% per annum during 2015-2019. However, these exports remain relatively concentrated in a few product categories—

especially GTF—and destination markets. Overall trade volumes are large relative to GDP, and Cambodia has had a persistent deficit in merchandise trade that has only been partially offset by a surplus in services trade. The merchandise trade deficit has been the key driver in the overall current account position, with the deficit averaging 10.2% of GDP during 2015–2019. The strong performance in the financial account has enabled Cambodia to build up its foreign exchange reserves since 2015, with import cover increasing from 5.7 months in 2015 to 8.8 months in 2019. Fiscal policy. Cambodia’s fiscal management has been sound, with an overarching PFM reform strategy helping to improve budget formulation and execution, and a more focused domestic resource mobilization strategy contributing to a rapid increase in domestic revenue collection. Cambodia’s tax administration was strengthened under the Medium-Term Revenue Mobilization Strategy 2014–2018 with focused efforts on broadening tax base and improving tax administration. The Revenue Mobilization Strategy 2019–2023 outlines further measures to strengthen revenue collection including the review of tax policies. Domestic revenue mobilization has improved significantly, with government revenues rising from 19.6% of GDP in 2015 to an estimated 25.9% of GDP in 2019. This has enabled the government to strengthen its provision of public goods while ensuring budget sustainability. Net borrowing averaged 1.5% of GDP during 2015–2019, compared to 3.5% of GDP during 2010–2014. In fact, domestic revenue collection repeatedly surpassed budget forecasts, and the government opted to save these additional revenues rather than approve supplementary appropriations. As a result, government deposits at the central bank increased from $1.1 billion (6.8 % of GDP) in December 2014, to $5.92 billion (22.0% of GDP) in December 2019.

Appendix 4 25

Access Criteria ADB Staff Assessment Debt management. Cambodia has been prudent in its management of sovereign debt. Government borrowing is limited to concessional loans from bilateral and multilateral lenders. Public borrowing is transparent with information published online regularly in a public debt bulletin. Debt management is reasonably strong, and the government has committed to making further improvements under its Debt Management Strategy, 2019–2023. Public debt is low and stood at 29.6% of GDP in 2019, compared to an average of 29.8% of GDP during 2015–2019 and 30.7% of GDP during 2010–2014.

Monetary policy and financial sector regulation. Cambodia’s monetary policy aims to maintain price stability. The NBC governor chairs the Monetary Policy Committee and this committee meets at least 4 times per year to review policy settings. Cambodia has maintained stable prices and the exchange rate between USD and KHR has remained within a narrow band. However, the scope for independent monetary and exchange rate policies remains limited due to the high levels of de-facto dollarization. The financial sector has grown significantly and has attracted a growing share of new FDI inflows. Facilitating regulation has been accompanied by progressive strengthening of bank supervision and oversight.

4. Structural Reforms

Health. The government has implemented a comprehensive response to control the spread of COVID-19. The MOH has based their Master Plan for COVID-19 Response on WHO’s Strategic Preparedness and Response Plan, and effectively coordinates with health partners to work together and mobilize resources. Cambodia’s costed action plan for health requires an indicative necessary budget of $60.0 million, which may increase to $100.0 million (of which 40% will be financed from external sources). Health responses are categorized into three categories of needs (prevention and detection, clinical management and treatment, and coordinating and supporting measures), under community transmission scenario. For prevention and detection, the government has allocated approximately $4.7 million for rapid response teams. The MOH has assigned and deployed 2,118 trained rapid response team members at below-district level across Cambodia’s 25 provinces, for surveillance, support for testing and laboratories, contact tracing, and specimen transfer. The MOH has temporarily deployed 250 quarantine officials and thermal imaging cameras at border posts and international airports; formed quarantine teams composed of representatives from the MOH, the MOL, local authorities, and police and military, who, along with 90,000 workers, are tasked to monitor movement and health of people (both male migrant workers and female spouses who tend to migrate with them).b Public information through phone messages, social media, press briefings, and basic hygiene education has been rapid and widespread. Under clinical management and treatment ($45.4 million), major equipment including 25 ventilators, 75 patient monitors, 10 thermal imaging cameras, and 100,000 personal protective equipment sets have been procured, including three million masks for garment workers and returned migrants. Minor refurbishments required for isolation and treatment centers have started,c and training for clinical management has begun. Coordination and support systems ($9.8 million) actions include establishment of emergency operation centers in all 25 provinces, incentives for health staff, and provision of food and basic supplies for patients. The MOH has procured an additional 3 million masks for garment workers (the majority of whom are women) and returned migrants, recognizing their vulnerabilities. To date, government covers all costs for COVID-19 at health facilities or provides services free of charge elsewhere. Social protection. The government is leveraging existing registries and mobile payments technology to rapidly implement a new cash subsidy scheme program to support households that were experiencing food and non-food poverty even before COVID-19 and households and individuals that have been pushed into poverty by COVID-19. The IDPoor registry provides the foundation for the new cash subsidy scheme. This registry includes approximately 14.5% of all households. Payments to these households will be scaled according to household need and cost of living.

26 Appendix 4

Access Criteria ADB Staff Assessment Households in the IDPoor program receive an Equity Access Card, which enables them to access a variety of programs and services. However, until now no routine cash payments have been linked to the IDPoor database. The government now plans to implement a rapid two-phase program to roll out cash subsidies. In phase 1, existing IDPoor 1 and IDPoor 2 households will be invited to register for cash benefits at their local commune. Details from the households Equity Access Card will be registered enabling them to access monthly payments. Phase 2 would involve enrolling new individuals and households onto IDPoor through roll-out of a new ‘On Demand IDPoor program’. This would include urban households. The government estimates that 4–6 weeks will be needed to prepare for the launch of phase 1, and that implementation of phase 2 could commence in June 2020 if systems development and recruitment and training of enumerators begin immediately. The overall budget for cash subsidy scheme has been set at $300 million for 2020. Payments will be disbursed through the Wing mobile banking and money transfer platform, which have very broad coverage. The government announced partial wage subsidies for furloughed workers in the tourism and GTF industries for up to 4 months. In tourism, 50,451 workers employed by hotels, restaurants, and travel agencies will receive $40 per month with additional contributions from employers. An estimated 506,082 workers in GTF companies will receive $40 from the government and $30 from employers. Public financial management. The government has put in place a long-term and comprehensive PFMRP which commenced in 2005 and has a 4-platform approach with sequenced long-term reforms. Stage 1 of PFMRP (2005–2008) focused on enhancing credibility of the budget. Budget credibility was substantially achieved by 2008 and has been broadly maintained since then, through improvements in revenue mobilization, public debt management, and cash and bank account

management—all of which have been supportive of conservative fiscal policies and aggregate fiscal discipline at most times. This fiscal discipline has underpinned longer term macro-economic stability and high. Stage 2 of the PFMRP (2009–2015) focused on more effective financial accountability, internal controls, and payments system for improved accountability within the PFM system. Important progress included: (i) design of budget classifications and chart of accounts; (ii) development of three-year rolling budget strategic plans and establishing annual program budgeting; (iii) early

stages of procurement reform; and (iv) strengthening of internal controls and internal audit units. The current stage of the reform, Stage 3 (2016–2020), focuses on improving budget and policy linkages. Key activities under stage 3 include further institutionalization of program budgeting, budget integration and unification, and development of new business processes and organizational arrangements to support FMIS reforms. In addition, reforms to establish medium term forecasting is underway to link the medium-term fiscal framework and medium-term budget framework as well as further efforts to strengthen budget transparency. Successful implementation of stage 3 is integral to strengthening fiscal discipline and improved budget, accounting, and financial management systems to be complemented by more strategic resource allocation and greater scope to raise operational efficiency. Further rollout of the FMIS will provide a systematic base for improving the quality and integrity of the budget, thereby raising the scope for improved public service delivery. Stage 4 (2020–2025) for establishing performance accountability will be the final stage under the long-term framework for reform and will focus on improved performance accountability. Stage 4 will also further strengthen the earlier three stages whereby long-term systems and human capacity development initiatives will continue to be pursued.

Appendix 4 27

Access Criteria ADB Staff Assessment Trade integration, economic competitiveness, and financial sector development. Cambodia’s development strategy aims to maintain high growth through structural transformation and sustained productivity improvement. The government has made good progress in strengthening its overall planning framework and has shown readiness to undertake ambitious reforms. The IDP, 2016–2025 provides an overall framework for reform and sets ambitious targets for growth of manufacturing, diversification of manufacturing output and exports, and increased integration of SMEs into manufacturing value chains. The IDP acknowledges key challenges including Cambodia’s narrow industrial base, high level of informality, weak entrepreneurship, and low value addition and use of technology. It identifies five key pillars to achieving the overall vision: (i) improvement of policy, regulation and facilitation; (ii) improvement of technical knowledge and skills base; (iii) upgrading of infrastructure and logistics capabilities; (iv) financial sector deepening; and (v) improved labor market regulation. The government is currently undertaking a mid-term review of the IDP and is likely to update it to reflect the changing context due to COVID-19. The IDP is complemented by sector-level planning for upgrading of infrastructure and improvement of human capital. New plans in key areas such as the power sector, secondary education, and post-secondary technical and vocational education and training are being prepared with ADB support. Cambodia’s Trade Integration Strategy, 2019–2023 provides a strong framework for continued integration into international markets. The strategy anticipates the likely loss of trade preferences as Cambodia approaches graduation from LDC status and has a detailed work plan and action matrix to strengthen trade integration through bilateral and multilateral trade agreements. The strategy also includes a detailed domestic reform agenda to improve trade facilitation and upgrade relevant value chains. Cambodia has also made good progress in developing its financial sector. ADB has supported a comprehensive program to expand access to credit, improve financial inclusion and banking regulation, and deepen capital markets. This has included restructuring of the state-owned Agricultural and Rural Development Bank, strengthening of the national credit bureau, approval of legislation to enable electronic commerce, strengthening consumer protection, and facilitating the development of investment vehicles. The financial sector continues to be dominated by banking and microfinance, but there has also been progress in developing capital markets, with public offerings of equity in a handful of local firms and the first issuances of local currency denominated corporate bonds. The next phase of reforms to strengthen the financial sector includes plans for a national deposit protection scheme, further strengthening of banking sector regulation and oversight and development of a sovereign bond market. On the latter, government has expedited its plans for issuing sovereign debt to expand its options for domestic financing from 2021–2023 to 2020–2021.

5. Debt Sustainability

Cambodia is rated as being at low risk of debt distress. Cambodia’s public debt is moderately low and the outlook is stable over the medium term. Fiscal policy in Cambodia was prudent before the crisis, keeping budget deficits in check. Higher expenditure and a plunge in revenues are now expected to sharply widen fiscal deficits. ADB staff’s debt analysis concluded that the public debt is low and stood at 29.6% of GDP in 2019. The contracting economy and worsening fiscal deficit in 2020 are expected to drive the debt ratio up to 39.9% of GDP in 2020–2021 on average, from below 30% in 2019. The proposed ADB loan of $250 million, on broadly concessional terms, represents just 3.2% percent of Cambodia’s outstanding public debt stock of nearly $7.6 billion. The most recent World Bank–IMF debt sustainability assessment was prepared in December 2019. Under this assessment, Cambodia was rated as having strong debt carrying capacity with a maximum threshold for the present value of debt of 55.0% of GDP compared to an actual value of 22.5% in 2019. Borrowing costs are low, and there is limited

28 Appendix 4

Access Criteria ADB Staff Assessment exposure to rollover and interest-rate risk. Apart from rising fiscal deficits, some vulnerabilities arise out of contingent liabilities from public-private partnership projects. The CPRO financing of $250 million is equivalent to 0.94% of 2019 GDP. ADB’s debt sustainability assessment highlighted that the CPRO can provide critical countercyclical support but will not significantly affect the overall debt ratio nor the annual debt service. It will be provided within an overall fiscal framework that ensures debt sustainability. Cambodia is planning to develop its domestic bond market with a tentative timeline for 2021 launch. In time, issuance of domestic bonds will provide another financing source. Additional borrowing under the CPRO will have a minimal impact on the overall debt-to-GDP ratio, and Cambodia is expected to remain at low risk of debt distress.

6. Coordination with the IMF

The ADB team has consulted and coordinated closely with the IMF on Cambodia’s macroeconomic situation and forward-looking forecasts. The IMF mission confirmed sound macroeconomic management, and fiscal and debt position of Cambodia pre-crisis, and endorsed the proposed countercyclical support expenditure program. The letter dated 6 May 2020 concludes that expected growth in 2020 is at -1.6%, but downside risks to the outlook are substantial. This is driven largely by external factors: tourism has collapsed; orders for garments from foreign buyers have been cancelled; and large numbers of migrant workers have returned home with a consequent downturn in remittances. If COVID-19 containment measures continue, in Cambodia or abroad, disruptions to exports, remittances, and inward investment would result in a larger and more protracted growth slowdown, putting increased pressure on Cambodia’s fiscal position and balance of payments. This may be further exacerbated by tighter dollar liquidity and declining prices in the real estate sector. The IMF assessment letter also indicated that with the larger fiscal deficit under the revised IMF growth projection, external debt would increase to 31.0% of GDP in 2020 from 29.6% in end-2019 under the assumption that all fiscal financing needs are met by issuing external debt.

ADB = Asian Development Bank, BFI = Bank and Financial Institutions, COVID-19 = coronavirus disease, CPRO = COVID-19 pandemic response option, FDI = foreign directed investment, FMIS = Financial Management and Information System, GDP = gross domestic product, GTF = garments, textiles and footwear, IDP = Industrial Development Policy, IDPoor = Identification of Poor Households Programme, IMF = International Monetary Fund, KHR = Khmer Riel, LDC = less developed country, MFI = microfinance institutions, MOH = Ministry of Health, MOL = Ministry of Labour and Vocational Training, NBC = National Bank of Cambodia, PFM = public finance management, PFMRP = public finance management reform program, SME = small- and medium-sized enterprises, USD = United States Dollar, WHO = World Health Organization. a Given the lack of recent poverty data, this analysis uses the International Labor Organization’s working poverty estimates as a proxy to examine the likely impact

of COVID-19 on poverty in Cambodia. b International Organization for Migration. 2019. Assessing Potential Changes in the Migration Patterns of Cambodian Migrants and their Impacts on Thailand And

Cambodia. Bangkok. Thailand, where the majority of migrants go, does not make special provisions for family migration; yet of those surveyed, 85% were living in Thailand with their spouse.

c Cambodia COVID-19 Emergency Response Project. Project Information Document (PID).This work will be carried out with World Bank support.