Cambodia: Designing macroeconomic policies for an employment - friendly growth strategy

This paper authored by Muhammed Muqtada and Luyna Ung represents one of the background analyses. It argues for a proactive stance on macroeconomic policymaking, if Cambodia wishes to grow in a sustained and diversified manner toward full and productive employment for all. It notes that the current policy space is restricted, partly due to the additional conditionality that the defacto dollarization of the economy imposes. The paper suggests a possible nexus of mutually reinforcing macroeconomic and structural reforms, through examples of policy actions that could be taken in the spheres of monetary, fiscal, and exchange-rate policies.

Over the past 15 years Cambodia has made significant progress in terms of economic growth, job creation, and poverty alleviation. Since the late 1990s, Cambodia registered remarkable macroeconomic stability both in terms of prices as well as debts and deficit (except during the period of global financial crisis from 2007 to 2008). However, with the huge influx of US dollars, the economy gradually became “dollarized”. The paper argues that such dollarization, which has been favourable in sustaining growth so far, has rendered the macroeconomic policy framework rather reactive and the use of traditional policy instruments restrictive. Price stability remains a conditionality of dollarization. Strict fiscal and exchange-rate regimes are in place to support inflation targeting. Thus, the policy space is rather restricted for the economy to move towards higher and sustained growth, which is likely to require more investment and infrastructure development. The paper suggests a possible nexus of mutually reinforcing macroeconomic and structural reforms.