Tuesday, February 26, 2008

Managing Expectations in Cambodia

Some people are playing down the potential oil and gas boom in Cambodia. The original hope of a possible $2 billion a year in additional revenue has been reduced to an initial $150 million and a possible $1 billion in several years. It is still significant for an $8 billion economy with a $1 billion annual government budget. Still, the government is trying to manage expectations.

As its violent history fades from memory, the government knows that its legitimacy will be increasingly tied to economic performance and better governance. So Cambodian leaders have an interest of not making a big deal about possible oil and gas windfalls. Some observers said that the bauxite deposits may be longer lasting as a source of growth. One Western diplomat speculated that hydroelectric may generate more revenues than oil and gas but the Mekong River area could be severely harmed from the dams.

Two types of risks emerge from the possible energy boom. The first type is the immediate effect from having a large amount of revenue injected into the economy. One effect could include the “Dutch Disease.” Although the Cambodian economy is largely dollarized, thus giving it a chance of avoiding the exchange rate effects of Dutch Disease, other problems could appear such as resources being diverted away from tradable to nontradable goods. The other related effect is the strong possibility that revenues will simply disappear into the pockets of corrupt leaders or “silly” projects, leaving the country with nothing.

The other type of risk includes the possible societal responses to poorly managed revenues. Several people I interviewed agreed that possible responses from most likely to least would be: Social unrest from failed expectations and poor management; political change or instability coming from the emergence of rival factions; and a military coup from a frustrated army.


Matthew Hennessey said...

In conversation, you and I have frequently discussed how vexing currencies can be - and I don't mean to put you on the spot! - but it seems to me that a weakened dollar may actually work against Dutch Disease in Cambodia. The currency inflation that comes along with an energy boom could conceivably be offset by the languishing dollar if the dollarization you mentioned is really deeply rooted, yeah? Exports decline as the energy-effect inflates the currency. But widespread use of the disinflating dollar might balance that nicely.

Do you agree with this novice assessment?

I'm curious to know how commonly used dollars are. Are they widely accepted in shops? Are financial transactions denominated in dollars?

I hope you are keeping safe and eating well.

Jalal Alamgir said...

One way that Cambodia can prudently manage its oil and gas revenues is by following the Norway model of creating a special "rainy day" fund into which a significant portion of the revenues are automatically deposited. Other parts of the revenue can go into development expenditures.